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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-21479
ALLSTAR SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0515249
(State of Incorporation) (I.R.S. Employer Identification No.)
6401 Southwest Freeway
Houston, TX 77074
(Address of principal executive offices) (Zip code)
(Registrant's telephone number including area code: (713) 795-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __x__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the Common Stock on March 24,
1998, as reported on NASDAQ National Market System, was approximately
$11,591,000.
The number of shares of Common Stock, $.01 Par Value, outstanding as of
March 24, 1997 was 4,454,411.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III, Items 10,
11, 12, and 13.
PART I
Item 1. Business
Special Notice Regarding Forward-Looking Statements
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO
FUTURE EVENTS OR THE FUTURE FINANIAL PERFORMANCE OF THE COMPANY, INCLUDING BUT
NOT LIMITED TO STATEMENTS CONTAINED IN ITEM 1 - "FACTORS WHICH AFFECT FUTURE
OPERATING RESULTS," "ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," "PROPERTIES" AND "BUSINESS." READERS ARE
CAUTIONED THAT SUCH STATEMENTS, WHICH MAY BE IDENTIFIED BY WORDS INCLUDING
"ANTICIPATES," "BELIEVES," "INTENDS," "ESTIMATES," "EXPECTS" "PLANS" AND OTHER
SIMILAR EXPRESSIONS, ARE ONLY PREDICTIONS OR ESTIMATIONS AND ARE SUBJECT TO
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, OVER WHICH THE COMPANY HAS LITTLE OR
NO CONTROL. IN EVALUATING SUCH STATEMENTS, READERS SHOULD CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING MATTERS SET
FORTH IN "FACTORS WHICH MAY AFFECT THE FUTURE OPERATING RESULTS," WHICH COULD
CAUSE ACTUAL EVENTS, PERFORMANCE OR RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH STATEMENTS.
GENERAL
Allstar Systems, Inc. (the "Company") is a regional provider of
computer and telecommunications hardware and software products and related
services. The Company primarily markets its products and services in Texas from
five locations in the Houston, Dallas-Fort Worth, El Paso and Austin
metropolitan areas and through a small, recently opened office in McAllen,
Texas. During 1997, the Company's customer base of approximately 2,700 accounts
was comprised primarily of mid-sized customers and regional offices of larger
customers in commercial, educational and governmental sectors. The Company
positions itself to provide its customers with single-source solutions for both
their computer and telecommunications needs by offering a broad range of
products and services and by providing the expertise to support integrated
computer and telecommunications applications.
The Company's revenue is derived from sales of Computer Products, IT
Services, Telecom Systems and CTI Software. The Company is an authorized
reseller of computer products from Compaq, Hewlett-Packard, IBM, Microsoft,
Novell and other leading manufacturers. The Company has long-standing
relationships with leading aggregators and wholesale distributors of computer
hardware and software products which enable the Company to provide its customers
with competitive product pricing and ready product availability. IT Services
include system design, installation, integration and support services. With
respect to Telecom Systems, the Company markets, installs and services
telecommunications equipment, including PBX telephone systems from NEC,
Inter-tel and Mitel. In 1995, the Company introduced its proprietary CTI
Software products which facilitate computer and telephone integration, primarily
for telemarketing, call center and other high volume calling applications.
The Company was incorporated in 1983 as a Texas corporation and was
reincorporated in 1996 as a Delaware corporation. The Company's executive
offices are located at 6401 Southwest Freeway, Houston, Texas 77074 and its
telephone number is (713) 795-2000.
The market for computer products and services has experienced
significant growth in recent years and the use of such products and services
within organizations has been impacted by several concurrent trends. The
introduction of LANs and WANs has allowed organizations to supplement or replace
expensive, centralized mainframe computer systems with more flexible and
affordable PC-based client/server platforms. The emergence of widely accepted
industry standards for hardware and software has increased the acceptance of
open architecture LANs and WANs which can and frequently do contain products
from numerous manufacturers and suppliers. Rapid technological improvements in
computer hardware and the introduction of new software operating systems have
also created the need to expand or upgrade existing networks and systems. At the
same time, price decreases have made such networks and systems affordable to a
larger number of organizations. The Company believes that these trends have
increased the general demand for computer products and related information
technology services.
Distribution channels for computer products changed significantly
beginning in the early 1990s. During that period, many manufacturers of
computers began to scale back their sales forces and, in order to ensure the
continued wide distribution of their products, started to offer their products
to wholesale computer distributors which previously had sold only software and
peripheral equipment. In addition, manufacturers also began allowing resellers
to purchase products from more than one aggregator or distributor, a practice
known as "open sourcing. " Expanding computer sales to distributors and allowing
open sourcing intensified price competition among suppliers. The Company
believes that, in general, the manufacturers of its primary product lines are
continuing to rely to a large degree on resellers of computer products to
distribute a significant portion of their products to end-users. Distribution
patterns may continue to evolve, however, and any future changes may
significantly affect the Company's business.
The advent of open architecture networks has also impacted the market
for information technology services. Wider use of complex networks involving a
variety of manufacturer's equipment, operating systems and applications software
has made it increasingly difficult to diagnose problems and maintain the
technical knowledge and repair parts necessary to provide support services. The
Company believes that increased outsourcing of more sophisticated support
services by business and institutional customers has resulted from the technical
complexities created by multi-manufacturer and supplier network systems and
rapid technological change. Increasingly, organizations seeking computer
products often require prospective vendors not only to offer products from many
manufacturers and suppliers, but to have available and proficient service
expertise to assist them in product selection, system design, installation and
post-installation assistance and service. The Company believes that the ability
to offer customers a comprehensive solution to their information technology
needs, including the ability to work within its customers' corporate
environments as integral members of their management information system staff,
are increasingly important in the marketplace.
Telecommunications systems have evolved in recent years from simple
analog telephone systems to sophisticated digital systems, with modern digital
systems featuring voice processing, automated attendant, voice and fax mail,
automatic call distribution and call accounting. The ability to interface these
new digital phone systems to the user's PC-based computer systems now allows
these telephone systems to interact with the user's computerized data to create
powerful business solutions. New features, such as "caller ID" that is coupled
with a digital telephone system and integrated with a computer system, can
provide automatic look-up and display of account information while the user is
receiving a new call, thereby increasing productivity and the level of customer
service. Computerized "call accounting" allows an organization with integrated
telephone and computer systems to track telephone usage and long distance toll
billing and easily interface that data with computerized accounting and billing
systems. Integrated voice and facsimile handling allows a user to retrieve, send
and manage voice and facsimile messages on his computer screen. Computerized
telephone number listings allow the user to look up telephone numbers on the
computer and then have the computer dial the number automatically. For more
complex call center applications, computer systems can manage out-bound calling
campaigns while automatically blending in-bound calls to available agents in
order to enhance agent productivity.
The Company believes that the evolution of the digital telephone system
to a more open architecture, aided by standards established by Microsoft and
Novell for the interface of telephone and computer technologies, is causing
rapid industry change. This change is creating demand for digital telephone
systems which adhere to these new industry standards. These digital telephone
systems, along with the many software products which are rapidly becoming
available for use in CTI, require sophisticated installation and integration
service capability. The Company believes that the trend toward CTI is likely to
continue and that integrated voice, data and video communication will become
more affordable. As the technology and management of telecommunications and
computer systems converge over the next decade, the Company expects that growth
opportunities will be presented for companies able to provide and service the
latest integrated telecommunications and computer technologies.
BUSINESS STRATEGY
The Company's goals include continuing the growth of its
regionally-based business while preparing the Company to become a national
provider of computer and telephone hardware and software products and related
services. To achieve its objectives, the Company intends to pursue these key
strategies:
Expand Geographically. The Company intends to open additional offices within
Texas and in new regions to service existing customers and attract new
customers. The Company opened new offices in Austin, Texas in the third quarter
of 1997 and in McAllen and El Paso late in 1997. The Company intends to open
other offices in Texas and other regions as opportunities and circumstances
warrant.
Increase Telecom Systems And CTI Software Businesses. The Company began offering
Telecom Systems in 1994 in its Houston office and CTI Software in 1995 to
capitalize on the growing trend in CTI. The Company expanded Telecom Systems
operations to the Dallas-Fort Worth market in the second half of 1997. The
Company intends to expand its Telecom Systems operations to (i) all of its
offices, (ii) pursue acquisitions of regional telephone system resellers with
established customer bases in targeted markets, and (iii) increase the variety
and capabilities of its CTI Software products through internal development and
acquisitions of complementary software products.
Implement Internet-Based National Marketing Program. The Company intends to
implement a new method of marketing its Computer Products on a nationwide basis.
By accessing an Internet home page currently under development, the Company's
sales representatives and customers will be able to obtain product pricing and
availability data, enter or change orders and access customer account status
information. The Company plans to employ experienced sales representatives in
selected metropolitan markets who will be supported by the new Internet-based
system and by a national sales support call center performing order entry and
customer service functions.
After utilizing the Internet-based system to support its direct sales
force the Company expects to establish customer relationships in new markets
under the trade name "800 PC Deals." The Company then intends to establish
branch offices in certain of these markets. Implementation of this strategy was
anticipated to begin in the second half of 1997 but has been deferred
indefinitely until the Company can better ascertain the potential profitability
of this program and further develop its Internet based marketing systems. There
can be no assurance that the Company will complete the development of the
Internet system and if developed whether the Company will implement the
marketing program.
PRODUCTS AND SERVICES
The Company's revenues are derived from the marketing of technological
information systems. Management of the Company believes that such revenues are
reliant upon the ability to offer related services (which comprise less than 10
% of revenues) on those products. For the convenience of the reader the products
offered and the related services have been provided below.
COMPUTER PRODUCTS
The Company offers its customers a wide variety of computer hardware
and software products available from over 600 manufacturers and suppliers. The
Company's products include desktop and laptop computers, monitors, printers and
other peripheral devices, operating system and application software, network
products and mid-range host and server systems including the IBM RS6000 and DEC
Alpha systems. The Company is an authorized reseller of products from a number
of leading manufacturers of computer hardware, software and networking
equipment, including Compaq, Hewlett-Packard, IBM, Microsoft and Novell.
Products manufactured by Compaq, Hewlett-Packard and IBM in the aggregate
accounted for approximately 53.7%, 58.9%, and 56.8%, for 1995, 1996 and 1997,
respectively, of the Company's total inventory purchases. There can be no
assurance that the Company will continue to resell such manufacturers' products
in the future; however, the Company believes that its relations with all of its
major product manufacturers and distributors are satisfactory.
IT SERVICES
IT Services are provided by the Company both in conjunction with and
separately from its Computer Products sales. The Company typically prices its IT
Services on a time and materials basis or under fixed fee service contracts,
depending on customer preference and the level of service commitment required.
In markets where the Company does not maintain branch offices, it often
subcontracts for necessary technical personnel, particularly where required for
larger scope or prolonged duration contracts. The Company's IT Services include
the following:
Information Systems Support. The Company is an authorized warranty service
provider for many popular computer and computer peripheral products and provides
hardware repair and maintenance services, complex network diagnostic services,
end user support services and software diagnostic services. The Company also
offers complete outsourcing of a customer's computer and network management and
technical support needs on a contract basis. The Company provides on-site
service parts stocking, help desk assistance and fixed asset management and
tracking.
Contract Systems Engineer, Technician And Programmer Staffing. The Company
provides short-term supplemental technical staffing, including hardware and
software technicians, help desk personnel, systems and network engineers and
programming staff.
Systems Engineering. The Company provides systems engineering services including
information technology consulting, LAN/WAN design, on-site and remote network
administration, new technology feasibility and impact analyses and disaster
recovery plan analyses.
Information Technology Project Management. The Company provides project
management services for major hardware and software upgrades and conversions,
roll-outs of major new hardware and software installations and large network
installations, including multiple city WAN implementations.
Telecommunications And Data Systems Cabling. The Company provides networking and
telecommunications cabling services required for all major networking
topologies, including fiber optic cabling. The Company also offers cabling
services for adding to, moving or changing existing network systems.
Contract Programming Services. Recently, the Company has begun to offer contract
programming services, primarily related to SQL database design and
implementation, client server applications and Internet site development.
IT Staffing Services. In January 1997 the Company, through its wholly-owned
subsidiary IT Staffing, Inc., began providing technical personnel for temporary
and permanent positions to it customers. The Company recruits and places
personnel for a wide variety of technical positions related principally to
computing hardware and software skill sets.
To support and maintain the quality of these services and to maintain
vendor accreditation necessary to resell and service its significant product
lines, the Company's technical staff participate in various certification and
authorization programs sponsored by hardware manufacturers and software
suppliers. The Company currently has attained several certifications and
authorizations, most notably as a Microsoft Solution Provider and a Novell
Platinum Reseller. The Company's ability to attract and retain qualified
professional and technical personnel is critical to the success of its IT
Services business.
TELECOM SYSTEMS
The Company began its Telecom Systems business in 1994 to capitalize on
the trend toward CTI. The Company currently markets, installs and services
business telephone systems, including large PBX systems and small key systems,
along with a variety of related products including hardware and software
products for data and voice integration, wide area connectivity and telephone
system networking and wireless communications. The Company resells PBX systems
manufactured by NEC and Mitel and smaller "key systems," including products from
Macrotel, NEC and Winn Communications. Wireless products include products from
Uniden and Spectralink. Software products include voice mail products from
Active Voice and AVT, interactive voice response applications from AVT and call
center activity reporting products from Taske.
Prior to 1997, the Company marketed Telecom Systems only from its
Houston office. During the second half of 1997, the Company expanded Telecom
Systems sales to its Dallas office. The Company intends to expand the marketing
of its Telecom Systems products into each new office as they are established.
The Company also intends to expand its Telecom Systems products, particularly in
the area of CTI products, as suitable new products become available for resale.
CTI SOFTWARE
The Company develops and markets proprietary CTI Software, which
integrates business telephone systems and networked computer systems, under the
trade name "Stratasoft. " CTI Software is designed to improve the efficiency of
call center, both inbound and outbound and other high volume calling
applications. Basic products offered by the Company are typically customized to
suit a customer's particular needs and are often bundled with computer hardware
supplied by the Company at the customer's request. The Company entered the CTI
Software business in late 1995 by acquiring two CTI products, currently sold
under the names StrataDial and StrataVoice, from a corporation owned by the
individual who presently manages the Company's CTI Software operations. A new
product, Strata-Interactive, has also been developed by the Company. The Company
now markets these three CTI Software products, which are described below:
Stratadial. StrataDial is a predictive dialer software product for outbound call
center applications such as sales and promotion, collections, surveys, lead
generation and announcements that require personal contact. StrataDial features
inbound/outbound call blending without requiring an automated call distribution
feature ("ACD") of the PBX telephone system. StrataDial collects campaign
specific data during the telephone call and provides comprehensive on line
reporting and statistical analysis of the campaign data. StrataDial also
features open architecture which allows easy interaction with the customer's
other database applications. Dialing parameters and campaign characteristics can
be changed without shutting down the dialer, as is required with many competing
products. During 1997, the Company sold and installed 48 StrataDial systems.
Stratavoice. StrataVoice is an outbound dialing product designed for high volume
applications that do not require human interaction. StrataVoice applications
include appointment confirmation and setting, court appearance notification,
surveys, community notification such as school closings and emergency
evacuation, employee updates, absenteeism notification, telemarketing and market
research. A telephone system utilizing StrataVoice dials a computerized list of
numbers and can ask the contacted person a number of questions, including
branching to other questions and statements based on responses. StrataVoice also
allows the contacted person to leave messages. Scripting tools are included that
allow the user to develop campaigns. The system builds a database of respondent
data and has comprehensive response reporting capabilities. During 1997, the
Company sold and installed 122 StrataVoice systems.
Strata-Interactive. Strata-Interactive is an interactive voice response ("IVR")
software product which allows telephone calls to access computer information at
any time using a simple touch-tone telephone. Applications for IVR technology
vary and include insurance coverage verification and claims reporting, utility
company account information and outage reporting, bank account information and
on-line transactions, and shipment verification and tracking information.
Strata-Interactive is based upon open architecture and is designed to work with
networked computers. The first beta version of the product was delivered to a
customer in June 1996. In 1997, the Company began integrating the
Strata-Interactive components into the Strata-Dial and Strata-Voice products.
The Company expects the majority of the Strata-Interactive product will be
marketed as a component of Strata-Dial.
SALES AND MARKETING
DIRECT SALES
The Company markets its products and services primarily through direct
sales representatives. Direct sales representatives are teamed with in-house
customer service representatives and are assigned to specific customer accounts.
The Company believes that direct sales lead to better account penetration and
management, better communications and long-term relationships with its
customers. The Company's sales personnel, including account managers and
customer service representatives, are partially compensated, and in some cases
fully compensated, on the profitability of accounts which they participate in
developing. The Company believes that its past and future growth will depend in
large measure on its ability to attract and retain qualified sales
representatives and sales management personnel. The Company promotes its
products and services through general and trade advertising, participation in
trade shows and telemarketing campaigns. The Company believes that a significant
portion of new customers of its Computer Products and IT Services businesses
originates through word-of-mouth referrals from existing customers and industry
members, such as manufacturer's representatives. Additionally, Telecom Systems
sales personnel seek to capitalize on the many customer relationships developed
by the Company's Computer Products and IT Services personnel. By virtue of their
computer business contacts, Computer Products and IT Services personnel often
learn at a relatively early stage that their customers may soon be in the market
for telecommunications equipment and services. Sales leads developed by this
synergy are then jointly pursued. CTI Software is marketed by direct sales
representatives to organizations using telemarketing, call centers or other high
volume telecommunications functions. In addition, StrataVoice is marketed
through resale arrangements between the Company and a VAR.
INTERNET-BASED SALES SUPPORT SYSTEM
The Company has been developing an Internet-based sales support system
that will be used by its entire sales force, however the Company does not intend
to activate the sales support until additional development occurs. The system
will allow sales representatives to access information on product pricing and
availability, enter and track specific orders and monitor customer account
information. Sales representatives will be able to access the system from their
desktop computers at the Company's offices or on the Internet. The system will
also allow selected customers to enter and manage their own orders on-line. The
Company believes that when implemented this sales support system will enhance
the productivity and flexibility of its sales force and improve its customer
service.
800 PC DEALS
The Company intends to use its proposed Internet-based sales support
system to cost-effectively expand its marketing efforts for Computer Products on
a national level under the trade name 800 PC Deals. Specifically, the Company
intends to employ sales representatives with local experience in targeted
metropolitan markets to establish customer relationships utilizing the new
system. The Company also plans to operate a national sales support call center
to serve sales representatives and customers. Initially, the Company intends to
fulfill a large portion of orders in these new markets by drop shipping product
directly from suppliers to customers. Once sufficient customer relationships are
established and market knowledge is developed, the Company may seek to establish
a branch office in a market. No definitive schedule has been established for the
commencement of operations as 800 PC Deals.
There can be no assurance that the new system will function as expected
or, if so, that its implementation will enable the marketing approach of 800 PC
Deals to be successful. Many factors could influence the performance of 800 PC
Deals, including competition by others using similar systems, technical
difficulties in the implementation of the new Internet-based system, lack of
customer or supplier acceptance and the inability of local, direct sales
representatives to successfully market Computer Products through 800 PC Deals.
CUSTOMERS
The Company focuses its marketing efforts on mid-sized customers and
regional offices of larger customers located in or near the metropolitan areas
in Texas in which the Company maintains offices. The Company occasionally
provides Computer Products and IT Services in markets where the Company does not
have an office, typically to branch operations of customers with which the
Company has an established relationship. The Company's customer base is not
concentrated in any industry group. Over 2,700 customers purchased products or
services from the Company during 1997. In 1997, the largest single customer
constituted 4.8% of total revenues, however in prior years the Company's largest
customer has constituted as high as 11.2% of revenues.
The Company has only a small amount of backlog relative to total
revenues because the Company has no long-term commitments by customers to
purchase products or services from the Company. Although the Company has service
contracts with many of its large customers, such service contracts are
project-based and/or terminable upon relatively short notice. A significant
reduction in orders from any of the Company's largest customers could have a
material adverse effect on the Company's financial condition and results of
operations.
SUPPLY AND DISTRIBUTION
The Company relies on aggregators and distributors of computer
hardware, software and peripherals to supply a majority of its Computer
Products. Although the Company uses many industry suppliers, the Company
purchases its Computer Products chiefly from two suppliers, Inacom and Ingram,
to obtain competitive pricing, better product availability and improved quality
control. The Company attempts to develop strategic arrangements with its
principal suppliers, including the coordination of drop shipment orders, the
outsourcing of certain computer configuration services, national roll-out and
installation projects and the sharing of product information. Telecommunications
hardware and software products are generally purchased by the Company on an
as-needed basis directly from the original equipment manufacturer.
The Company's largest supplier of Computer Products is Inacom, a
leading computer products aggregator. Inacom markets and distributes computer
products and provides various services on a wholesale basis through a network of
franchisees and resellers and also markets its products directly to end-users.
During 1995, 1996 and 1997, the Company purchased from Inacom approximately
36.6%, 57.0% and 51.4%, respectively, of its total inventory purchases. The
Company purchases Computer Products and obtains drop shipping and other services
from Inacom pursuant to an agreement entered into in August 1996 (the "Inacom
Agreement"). Under the Inacom Agreement, the Company is required to purchase at
least 80% of its Computer Products from Inacom, but only to the extent that such
products are made available within a reasonable period of time at reasonably
competitive pricing. Pricing from Inacom is generally based on Inacom's cost
plus a negotiated markup. With certain exceptions, the Company is entitled to
volume discounts at agreed upon levels. The term of the Inacom agreement expires
on December 31, 2001, and automatically renews for successive one year periods
unless notice of non-renewal is given 60 days prior to the end of the renewal
period. A cancellation fee of $570,500 will be payable by the Company in the
event of non-renewal or early termination of the Inacom Agreement by either
party.
The Company's second largest supplier of computer products is Ingram.
The Company also purchases its Computer Products from Ingram on a cost-plus
basis. During 1995, 1996 and 1997, the Company purchased from Ingram
approximately 20.6%, 14.7% and 20.0% respectively, of its total inventory
purchases. The Company's agreement with Ingram provides for volume discounts at
agreed upon levels. The agreement with Ingram may be terminated by either party
upon 30 days prior written notice.
Due to intense price competition among computer products resellers, the
price and shipping terms received by the Company from its suppliers, especially
Inacom and Ingram, are critical to the Company's ability to compete in Computer
Products. From time to time the availability of certain products has been
limited. Although the Company has not experienced unusual product availability
problems and has been generally satisfied with the product pricing and terms
available from its principal suppliers, there can be no assurance that such
relationships will continue or that, in the event of a termination of its
relationship with either Inacom or Ingram, or both, it would be able to obtain
an alternative supplier or suppliers without a material disruption in the
Company's ability to provide competitively priced products to its customers.
The Company maintains standard authorized dealership agreements from
many leading manufacturers of computer and telecommunications hardware and
software. Under the terms of these authorized dealership agreements, the Company
is entitled to resell associated products to end-users and to provide warranty
service. The Company's status as an authorized reseller of key product lines is
essential to the operation of the Company's business. In general, the authorized
dealer agreements do not require minimum purchases and include termination
provisions ranging from immediate termination to termination upon 90 days prior
written notice. Some of such agreements are conditioned upon the continuation of
the Company's supply arrangement with Inacom or another major wholesaler
acceptable to the manufacturer.
The Company operates a warehouse at its Houston and Dallas offices for
the purpose of receiving, warehousing, configuration and shipping products. The
Company plans to consolidate its two warehouses into one central regional
warehouse located in the Dallas-Fort Worth metropolitan area in order to achieve
further productivity and efficiency enhancements.
During 1995, the Company began an initiative to drop ship a higher
percentage of its orders directly from the supplier to customer in order to
lower its distribution costs and freight costs. This initiative has resulted in
the percentage of drop shipped orders (measured by the cost of goods drop
shipped as a percentage of total cost of goods) growing from 5. 1% during the
six months ended June 30, 1995 to 18.1% during 1996 and 23.9% in 1997. While the
Company does not believe that it is in its best interest to drop ship all
orders, it does intend to continue to move more of its Computer Products
distribution toward drop shipments.
MANAGEMENT INFORMATION SYSTEMS
The Company depends on its customized MIS to manage most aspects of its
business. The Company's MIS provides its sales staff, customer service
representatives and certain customers with product price, information and
availability from its principal suppliers' warehouses throughout the United
States. The Company utilizes its MIS to rapidly source product from a wide range
of suppliers. Purchase order expediting features including overdue shipment and
partial shipment reporting enable the Company to identify and resolve supplier
and or freight carrier problems quickly. The purchasing systems are real time,
allowing buyers to act within minutes on a newly received and credit-approved
sales order. The Company's MIS contain productivity tools for sales lead
generation, including integration between telemarketing and prospect database
management. Sales management features include a variety of reports available for
any combination of customer, salesperson, sales team and office criteria. The
Company uses its MIS to manage service contracts, service calls and work orders,
engineer and technician scheduling and time tracking, service parts acquisition
and manufacturer warranties. Reporting can also be generated for project
profitability, contract and customer analysis, parts tracking and employee time
tracking.
During the first quarter of 1998 the Company commenced a conversion of
its MIS to a more powerful computing platform which will allow the Company to
improve and enhance its MIS. The new system will allow the Company to expand it
uses and more fully integrate its operations with the MIS. While the Company
expects the system conversion to be fully implemented with only normal debugging
and reprogramming, a failure to fully implement the conversion with only minimal
disruption of its operation could have an adverse effect on the Company's
results of operations and financial condition.
The system conversion was implemented as a general upgrading of the
Company's MIS and was not for the purpose of achieving Year 2000 compliance. The
Company believes its prior MIS was, and its new MIS is, Year 2000 compliant.
Accordingly, the Company does not believe that Year 2000 compliance will have a
material adverse effect on its results of operations or financial condition. It
is possible that the Company could be impacted if its significant suppliers or
customers do not successfully and timely achieve Year 2000 compliance with
respect to their own computer systems. The Company has inquired of its two major
suppliers as to the status of their Year 2000 compliance and has been advised
that they expect to achieve Year 2000 compliance. If, contrary to the Company's
expectations, it or the significant suppliers and customers fail to achieve Year
2000 compliance in a timely manner, the Company's results of operations and
financial condition could be materially and adversely effected.
EMPLOYEES
As of December 31, 1997, the company employed approximately 363
individuals. Of these, approximately 81 were employed in sales, marketing and
customer service, 153 were employed in engineering and technical positions and
129 were employed in administration, finance and MIS. The Company believes that
its ability to recruit and retain highly skilled and experienced technical,
sales and management personnel has been, and will continue to be, critical to
its ability to execute its business plans. None of the Company's employees are
represented by a labor union or are subject to a collective bargaining
agreement. The Company believes that its relations with its employees are good.
COMPETITION
The markets in which the Company competes are all intensely competitive
and changing rapidly. The Company believes that the principal competitive
factors in the business activities in which it operates include relative price
and performance, product availability, technical expertise, adherence to
industry standards, financial stability, service, support and reputation. The
Company believes that it has many direct and indirect competitors in each of its
businesses, none of which is dominant in the Company's geographic markets. The
Company's competitors include major computer products and telephone equipment
manufacturers, aggregators and distributors, including certain manufacturers,
aggregators and distributors which supply products to the Company. Other
competitors include established national, regional and local resellers, systems
integrators, telephone systems dealers, computer-telephony VARs and other CTI
software suppliers. Some of the Company's current and potential competitors have
longer operating histories and financial, sales, marketing, technical and other
competitive resources which are substantially greater than those of the Company.
As the markets in which the Company competes have matured, product
price competition has intensified and is likely to continue to intensify. Such
price competition could adversely affect the Company's financial condition and
results of operations. There can be no assurance that the Company will be able
to continue to compete successfully with existing or new competitors.
HISTORY AND REINCORPORATION
The Company was incorporated under Texas law in 1983 under the name
Technicomp Corp. On June 30, 1993, the Company changed its name to
Allstar-Valcom, Inc. and then again, on December 28, 1993, the Company changed
its name to Allstar Systems, Inc. On December 27, 1993, the Company engaged in a
merger in which it was the surviving corporation. In the merger, Allstar
Services, Inc. and R. Cano, Inc. , both of which were affiliated with the
Company, were merged with and into Allstar Systems, Inc. in order to streamline
the business. In 1995, Company formed a wholly owned subsidiary, Stratasoft,
Inc. , to purchase and develop its CTI Software. See "Certain Relationships and
Related Transactions--Acquisition of Stratasoft Products. The Company effected a
reincorporation and merger in the State of Delaware through which the 328,125
shares of the Company's predecessor, Allstar Systems, Inc. , a Texas
corporation, which were outstanding prior to the merger, will be converted into
approximately 2,675,000 shares of the newly incorporated Delaware corporation
(the "Reincorporation"). The effect of the Reincorporation on the number of
shares outstanding prior to the Reincorporation was similar in effect to an
approximately 8.15-for-1 stock split.
FACTORS WHICH MAY AFFECT FUTURE RESULTS OF OPERATION
Risk Of Low Margin Business
The Company's past growth in net income has been fueled primarily by
sales growth rather than increased gross profit margins. Given the significant
levels of competition that characterize the computer reseller market, it is
unlikely that the Company will be able to increase gross profit margins in its
core business of reselling computer products which accounted for approximately
86% of the Company's total revenue in 1997. Moreover, in order to attract and
retain many of its larger customers, the Company frequently must agree to volume
discounts and maximum allowable markups that serve to limit the profitability of
sales to such customers. Accordingly, to the extent that the Company's sales to
such customers increase, the Company's gross profit margins may be reduced and,
therefore, any future increases in net income will have to be derived from
continued sales growth or effective expansion into higher margin businesses,
neither of which can be assured. Furthermore, low margins increase the
sensitivity of the Company's results of operations to increases in operating
expenses, including costs of financing. Any failure by the Company to maintain
or increase its gross profit margins and sales levels could have a material
adverse effect on the Company's financial condition and results of operations.
Dependence On Availability Of Credit; Interest Rate
The Company's business activities are capital intensive in that the
Company is required to finance accounts receivable and inventory. In order to
obtain necessary working capital, the Company relies primarily on lines of
credit under which the available credit and credit limits are dependent on the
amount and quality of the Company's accounts receivable and inventory. As a
result, the amount of credit available to the Company may be adversely affected
by factors such as delays in collection or deterioration in the quality of the
Company's accounts receivable, inventory obsolescence, economic trends in the
computer industry, interest rate fluctuations and the lending policies of the
Company's lenders. Many of these factors are beyond the Company's control. Any
decrease or material limitation on the amount of capital available to the
Company under its credit lines and other financing arrangements would limit the
ability of the Company to fill existing sales orders, purchase inventory or
expand its sales levels and, therefore, would have a material adverse effect on
the Company's financial condition and results of operations. In addition, any
significant increases in interest rates will increase the cost of financing to
the Company and would have an adverse effect on the Company's financial
condition and results of operations. The inability of the Company to have
continuous access to such financing at reasonable costs would materially and
adversely impact the Company's financial condition and results of operations.
(See Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations).
Highly Competitive Business
The Company is engaged in business activities that are intensely
competitive and rapidly changing. The Company believes that the principal
competitive factors in the business in which it operates are relative price and
performance, product availability, technical expertise, adherence to industry
standards, financial stability, service support and reputation. Price
competition has intensified, particularly in the Company's Computer Products and
IT Services businesses, and is likely to continue to intensify. Such price
competition could materially adversely affect the Company's financial condition
and results of operations. The Company's competitors include major computer
products and telephone equipment manufacturers, aggregators and distributors,
including certain manufacturers, aggregators and distributors which supply
products to the Company. Other competitors include established national,
regional and local resellers, systems integrators, telephone systems dealers,
computer-telephony VARs and other CTI software suppliers. Some of the Company's
current and potential competitors have longer operating histories and financial,
sales, marketing, technical and other competitive resources which are
substantially greater than those of the Company. As a result, the Company's
competitors may be able to adapt more quickly to changes in customer needs or to
devote greater resources than the Company to sales and service of its products.
Such competitors could also attempt to increase their presence in the Company's
markets by forming strategic alliances with other competitors of the Company,
offer new or improved products and services to the Company's customers or
increase their efforts to gain and retain market share through competitive
pricing.
Management Of Growth; Regional Concentration
The Company has experienced rapid growth which has and may continue to
put strains on the Company's management and operational resources. The Company's
ability to manage growth effectively will require it to continue to implement
and improve its operational, financial and sales systems, to develop the skills
of its managers and supervisors and to hire, train, motivate and manage its
employees. The Company's future growth, if any, is expected to require the
addition of new management personnel and the development of additional expertise
by existing management personnel. The failure to do so could materially
adversely affect the Company's financial position and results of operation.
Within the next 12 months, the Company intends to open new offices. The Company
also plans to relocate its Dallas-Fort Worth office and consolidate
substantially all of its warehouse and distribution operations in the
Dallas-Fort Worth metropolitan area. The Company anticipates that it will incur
substantial costs in connection with these new office openings, including
expenditures for furniture, fixtures and equipment. Additional burdens on the
Company's working capital are also expected in connection with the start-up of
such operations. Any significant disruption or unanticipated expenses in
connection with these plans could also have a material adverse effect on the
Company's financial condition and results of operations. For the foreseeable
future, the Company expects that it will continue to derive most of its total
revenue from customers located in or near the metropolitan areas in Texas in
which the Company maintains offices. Accordingly, an economic downturn in any of
those metropolitan areas, or in the region in general, would likely have a
material adverse effect on the Company's financial condition and results of
operations.
Dependence On Key Personnel
The success of the Company for the foreseeable future will depend
largely on the continued services of key members of management, leading
salespersons and technical personnel. The Company is particularly dependent upon
James H. Long, founder, Chairman of the Board, President and Chief Executive
Officer of the Company, because of his knowledge of the Company's operations,
industry knowledge, marketing skills and relationships with major vendors and
customers.
The Company does not maintain key personnel life insurance on any of
its executive officers or salespersons other than Mr. Long. The Company's
success also depends in part on its ability to attract, hire, train and retain
qualified managerial, technical and sales and marketing personnel at a
reasonable cost, particularly those involved in providing systems integration,
support services and training. Competition for such personnel is intense. The
Company's financial condition and results of operations could be materially
adversely affected if the Company were unable to attract, hire, train and retain
qualified personnel.
Dependence On Continued Authorization To Resell And Provide Manufacturer-
Authorized Services
The Company's future success in both product sales and services depends
largely on its continued status as an authorized reseller of products and its
continued authorization as a service provider. With respect to the Company's
computer hardware and software product sales and service, the Company maintains
sales and service authorizations with many industry-leading manufacturers,
including Compaq, Hewlett-Packard, IBM, Microsoft, NEC and Novell. In addition,
some of such agreements are based upon the Company's continued supply
relationship with Inacom or another aggregator or distributor approved by such
manufacturers. With respect to the Company's Telecom Systems business, the
Company maintains sales and service authorizations with industry-leading
manufacturers, including Active Voice, AVT, NEC, Inter-tel and Mitel. Without
such sales and service authorizations, the Company would be unable to provide
the range of products and services currently offered by the Company. In
addition, loss of manufacturer authorizations for products that have been
financed under the Company's credit facilities constitutes an event of default
under such credit facilities. In general, the agreements between the Company and
its products manufacturers either provide for fixed terms or for termination on
30 days prior written notice. Failure to maintain such authorizations could have
a material adverse effect on the Company's financial position and its results of
operations.
Dependence On Suppliers
The Company's business depends upon its ability to obtain an adequate
supply of products and parts at competitive prices and on reasonable terms. The
Company's suppliers are not obligated to have product on hand for timely
delivery to the Company nor can they guarantee product availability in
sufficient quantities to meet the Company's demands. The Company procures a
majority of computers, computer systems, components and parts primarily from
Inacom and Ingram in order to obtain competitive pricing, maximize product
availability and maintain quality control. Any material disruption in the
Company's supply of products would have a material adverse effect on the
Company's financial condition and results of operations.
Rapid Technological Change
The business in which the Company competes is characterized by rapid
technological change and frequent introduction of new products and product
enhancements. The Company's success depends in large part on its ability to
identify and obtain products that meet the changing requirements of the
marketplace. There can be no assurance that the Company will be able to identify
and offer products necessary to remain competitive or avoid losses related to
obsolete inventory and drastic price reductions. The Company attempts to
maintain a level of inventory required to meet its near term delivery
requirements by relying on the ready availability of products from its principal
suppliers. Accordingly, the failure of the Company's suppliers to maintain
adequate inventory levels of products demanded by the Company's existing and
potential customers and to react effectively to new product introductions could
have a material adverse effect on the Company's financial condition and results
of operations. Because certain products offered by the Company are subject to
manufacturer or distributor allocations, which limit the number of units
available to the Company, failure of the Company to gain sufficient access to
such new products or product enhancements could also have a material adverse
effect on the Company's financial condition and results of operations.
Reliance On Key Customers
The Company's top ten customers (which have varied from year to year)
accounted for 27.9%, 33.2% and 21.2% of the Company's revenue during 1995, 1996
and 1997, respectively. Based upon historical results and existing relationships
with customers, the Company believes that a substantial portion of its total
revenue and gross profit will continue to be derived from sales to existing
customers. There are no long-term commitments by such customers to purchase
products or services from the Company. Product sales by the Company are
typically made on a purchase order basis. A significant reduction in orders from
any of the Company's largest customers could have a material adverse effect on
the Company's financial condition and results of operations. Similarly, the loss
of any one of the Company's largest customers or the failure of any one of such
customers to pay on a timely basis could have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that the Company's largest customers will continue to place orders
with the Company or that orders by such customers will continue at their
previous levels. There can be no assurance that the Company's service customers
will continue to enter into service contracts with the Company or that existing
contracts will not be terminated.
Reliance On Management Information Systems
The Company's success is largely dependent on the accuracy, quality and
utilization of the information generated by its customized management
information systems, which affects its ability to manage its sales, accounting,
inventory and distribution systems. The Company anticipates that it will
continually need to refine and enhance its management information systems as the
Company grows and the needs of its business evolves. In view of the Company's
reliance on information and telephone communication systems, any interruption or
errors in these systems could have a material adverse effect on the Company's
financial condition and results of operations. (See Item 1 - Business
"Management Information Systems").
Acquisition Risk
The Company intends to pursue potential acquisitions of complementary
businesses. The success of this strategy depends not only upon the Company's
ability to acquire complementary businesses on a cost-effective basis, but also
upon its ability to integrate acquired operations into its organization
effectively, to retain and motivate key personnel and to retain customers of
acquired firms. No specific acquisitions are being negotiated or planned as of
the date of this annual report and there can be no assurance that the Company
will be able to find suitable acquisition candidates or be successful in
acquiring or integrating such businesses. Furthermore, there can be no assurance
that financing required for any such transactions will be available on
satisfactory terms.
Control By Existing Stockholders
James H. Long, founder, Chairman of the Board, President and Chief
Executive Officer of the Company owns 47.6% of the outstanding Common Stock and
Mr. Long will have the ability to control the election of a majority of the
members of the Company's Board of Directors, prevent the approval of certain
matters requiring the approval of at least two-thirds of all stockholders and
exert significant influence over the affairs of the Company.
Anti-Takeover Considerations
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that may delay, deter or prevent a change in control of the Company.
Among other things, these provisions authorize the board of directors of the
Company to issue shares of preferred stock on such terms and with such rights,
preferences and designations as the board of directors of the Company may
determine without further stockholder action and limit the ability of
stockholders to call special meetings or amend the Company's Certificate of
Incorporation or Bylaws. Each of these provisions, as well as the Delaware
business combination statute could, among other things, restrict the ability of
certain stockholders to effect a merger or business combination or obtain
control of the Company.
Absence Of Dividends
The Company expects to retain cash generated from operations to support
its cash needs and does not anticipate the payment of any dividends on the
Common Stock for the foreseeable future. In addition, the Company's credit
facilities prohibit the declaration or payment of dividends, unless consent is
obtained from each lender.
GLOSSARY OF NAMES AND TECHNICAL TERMS
COMPANY NAMES
3Com......................... 3Com Corporation
AVT.......................... Applied Voice Technology
Active Voice................. Active Voice Corporation
Aspen........................ Aspen System Technologies, Inc.
Compaq....................... Compaq Computer Corporation
DEC.......................... DEC Digital Equipment Corporation
DFS.......................... Deutsche Financial Services Corporation
Epson........................ Epson America, Inc.
Hewlett-Packard.............. Hewlett-Packard Company
IBM.......................... International Business Machines Corporation
IBMCC........................ IBM Credit Corporation
ILC.......................... International Lan and Communications, Inc.
Inacom....................... Inacom Corp.
Ingram....................... Ingram Micro, Inc.
Inter-tel.................... Inter-tel, Inc.
Macrotel..................... Macrotel International Corporation
Microsoft.................... Microsoft Corporation
Mitel........................ Mitel, Inc.
NEC.......................... NEC America, Inc.
Novell....................... Novell, Inc.
Taske........................ Taske Technology, Inc.
Uniden....................... Uniden America Corporation
All company names and trade names are the legal property of their
respective owners.
TECHNICAL TERMS
Aggregator................... A company that purchases directly from
manufacturers in large quantities, maintains
inventory, breaks bulk and resells to
distributors, resellers and value-added resellers
Configuration................ The customization of equipment to a customer's
specifications which may include the loading of
software, adding of memory or combining
different manufacturers' equipment in such a
way that it will be compatible as an integrated
system
CTI.......................... Computer and telephone integration
IVR.......................... Interactive voice response
LAN.......................... Local-area network
MIS.......................... Management information systems
Open architecture networks... Networks based on industry standard technical
specifications that enable
the system to operate with
hardware and software from
different manufacturers
meeting those standards
PBX.......................... Private branch exchange
PC........................... Personal computer
Price protection............. A voluntary policy by a manufacturer that when
a decrease in the price of its product is
instituted, the manufacturer will rebate the
Company for the difference between the new
price and the price paid by the Company for
product in its inventory
Roll-out..................... Single sale involving a large volume of similar
products to be delivered on a pre-specified
timetable
SQL.......................... Structured query language
VAR (Value-added reseller)... A company that purchases equipment or software
from a manufacturer, aggregator or distributor,
provides value added services to their
clients including network management,
configuration systems integration and
training and subsequently resells the
enhanced product
WAN.......................... Wide-area network
Item 2. Properties
FACILITIES
The Company does not own any real property and currently leases all of
its existing facilities. The Company subleases its headquarters and Houston
office which are housed in a free standing building of approximately 48,000
square feet. The Houston office sublease expires on December 31, 1998. The
Company expects to enter into a new leasing arrangement for the same facility
during 1998. The Company's Dallas office is housed in a free-standing building
of approximately 20,000 square feet. The Dallas facility lease expired on
September 30, 1997 and has been extended to June 30, 1998. The Company expects
to either renew the existing lease for an additional term of more than one year
or to relocate to different facilities within the Dallas-Ft. Worth metropolitan
area. The Company also leases a storage facility of approximately 7,000 square
feet in Houston. The lease on this warehouse expires on April 14, 1998 and the
Company intends to extend such lease on a month-to-month basis after expiration
of the lease. The Company added offices in Austin, McAllen and El Paso, Texas
during 1997. The Company has leased interim offices in each of those cities
under leases expiring in less than one year. The Company intends to lease other
facilities in these cities as its business expands. The Company believes that
suitable facilities will be available as needed.
INTELLECTUAL PROPERTY
The Company's success depends in part upon its proprietary technology,
including its Stratasoft software. The Company relies primarily on trade secrecy
and confidentiality agreements to establish and protect its rights in its
proprietary technology. Additionally, the Company filed and received copyright
protection for StrataDial and StrataVoice. The Company also applied and received
registration of Stratasoft, StrataDial, StrataVoice as trademarks and intends to
apply for registration of 800 PC Deals as a trademark. There can be no assurance
that the Company's present protective measures will be adequate to prevent
unauthorized use or disclosure of its technology or independent third party
development of the same or similar technology. While the Company's competitive
position could be affected by its ability to protect its proprietary and trade
secret information, the Company believes other factors, such as the technical
expertise and knowledge of the Company's management and technical personnel and
the timeliness and quality of support services provided by the Company, to be
more significant in maintaining the Company's competitive position.
The Company's various authorization agreements with manufacturers
generally permit the Company to refer to itself as an authorized dealer of the
respective manufacturer's products and to use their trademarks and trade names
for marketing purposes, but prohibit other uses. The Company considers the use
of these trademarks and trade names in its marketing efforts to be important to
its business.
Item 3. Legal Proceedings
On July 13, 1996, a former customer brought suit against the Company in
the 152nd Judicial District Court of Harris County, Texas. The plaintiff alleges
that the Company failed to provide and complete promised installation and
configuration of certain computer equipment within the time promised by the
Company. Based on these allegations, the plaintiff is suing for breach of
contract, negligence, negligent misrepresentation and other statutory violations
and is seeking actual monetary damages of approximately $3 million and treble
damages under the Texas Deceptive Trade Practices Act. The Company intends to
vigorously defend such action. The effect of an unfavorable outcome could have a
material adverse effect on the Company's results of operations and its financial
condition.
The Company is from time to time involved in routine litigation
incidental to its business. The Company believes that none of such proceedings,
including current proceedings, individually or in the aggregate will have a
materially adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On July 7, 1997 the Company completed its initial public offering of it
Common Stock. The shares are traded on the Nasdaq National Market under the
symbol "ALLS".
High Low
Fiscal 1997
Third quarter (Commencing July 7, 1997) 8 6
Fourth quarter 7 1/2 3 15/16
As of March 13, 1998 there were 15 holders of record of the Company's
common stock. The Company has never declared or paid any cash dividends on its
Common Stock. The Company currently anticipates that it will retain all earnings
for use in its business operations. The payment of dividends is prohibited under
the Company's credit agreements, unless approved by the lenders.
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
The following sets forth the selected data of the Company for the five
years ended December 31, 1997.
Year ended December 31
(In Thousands except share and per share amounts)
1993 1994 1995 1996 1997
Operating Data:
Total revenue $49,536 $64,076 $91,085 $120,359 $129,167
Cost of sales and services 42,289 55,541 79,857 104,302 111,126
------- ------- ------- ------- -------
Gross Profit 7,247 8,535 11,228 16,057 18,041
Selling, general and administrative expenses 6,060 7,448 9,149 12,284 14,386
------- ------- ------- ------- -------
Operating income 1,187 1,087 2,079 3,773 3,655
Interest expense (net of other income) 644 764 1,218 1,183 685
------- ------- ------- ------- -------
Income before provision for income taxes 543 323 861 2,590 2,970
Provision for income taxes 229 140 342 987 1,126
------- ------- ------- ------- -------
Net Income $ 314 $ 183 $ 519 $ 1,603 $ 1,844
======== ======== ======== ========= =========
Supplemental Data:
Net income per share:
Basic $ 0.15 $ 0.07 $ 0.19 $ 0.60 $ 0.52
Diluted.................................... $ 0.15 $ 0.07 $ 0.19 $ 0.60 $ 0.52
Weighted average shares outstanding............. 2,120,242 2,554,808 2,675,000 2,675,000 3,519,821
As of December 31
1993 1994 1995 1996 1997
Balance Sheet Data:
Working Capital................................. $1,307 $1,363 $1,732 $2,291 $12,824
Total Assets.................................... 17,431 19,077 24,266 24,720 33,183
Short-term borrowings(1)........................ 6,896 8,972 9,912 9,975 1,572
Long-term debt.................................. 43 -0- -0- -0- -0-
Stockholders' equity............................ 2,022 2,205 2,724 4,327 14,723
(1) See Note 5 to the Company's Consolidated Financial Statements. Short-term
borrowings do not include amounts recorded as floor plan financing which are
included in accounts payable.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements,
including the Notes thereto, included elsewhere in this Annual Report on Form
10-K.
Overview
The Company was formed in 1983 to engage in the business of reselling
computer hardware and software products and providing related services. To date,
most of its revenue has been derived from Computer Products sales. In addition,
the Company derives revenue from providing IT Services to purchasers of Computer
Products and other customers. The Company operated from a single office in
Houston, Texas until 1992 when it opened a branch office in Dallas, Texas. In
1994, the Company began offering Telecom Systems in its Houston office. In the
fourth quarter of 1995, the Company acquired and began marketing CTI Software.
During 1997 the Company opened offices in Austin, McAllen and El Paso, Texas to
expand, initially, its Computer Products and IT Services divisions.
The Company's gross margin varies substantially between each of its
businesses. The Company's Computer Products sales have produced a gross margin
ranging from 10.4% to 10.7% over the three year period ended December 31, 1997,
reflecting the commodity nature of the Computer Products market. The gross
margin for IT Services, which reflects direct labor costs, has ranged from 30.4%
to 37.6% over the same period. This variation is primarily attributable to the
pricing and the mix of services provided, and the level of utilization of
billable technical staff. The gross margin for Telecom Systems, which includes
both product sales and services, has varied between 23.0% and 35.5% during the
last three years. This variation reflects the different mix of product sales and
the amount of services-related revenue from period to period and competitive
pricing of Telecom products. The gross margin for CTI Software was 40.2% in 1996
versus 43.0% in 1997, primarily due to the amount expended by the Company to
acquire and develop the software relative to the level of revenue produced. CTI
Software accounted for approximately 1.1% of the Company's revenues in 1996
compared to 1.7% in 1997.
In order to reduce freight costs and selling, general and administrative
expenses associated with product handling, the Company began in 1995 to drop
ship a higher percentage of orders directly from its suppliers to its customers.
This initiative has resulted in the percentage of drop shipped orders (measured
by the cost of goods dropped shipped as a percentage of total cost of goods)
growing from 9.0% in 1995 to 18.1% in 1996 and to 23.9% in 1997. While the
Company does not believe that it is in its best interest to drop ship all
orders, it does intend to increase the volume of drop shipments in Computer
Products with the expectation of reducing its freight, distribution and
administrative costs related to these revenues.
A significant portion of Company's selling, general and administrative
expenses relate to personnel costs, some of which are variable and others of
which are relatively fixed. The Company's variable personnel costs are
substantially comprised of sales commissions, which are typically calculated
based upon the Company's gross profit on a particular sales transaction and thus
generally fluctuate with the Company's overall gross profit. The remainder of
the Company's selling, general and administrative expenses are relatively more
fixed and, while still somewhat variable, do not vary with increases in revenue
as directly as do sales commissions.
Manufacturers of many of the computer products resold by the Company have
consistently reduced unit prices near the end of a product's life cycle, most
frequently following the introduction of newer, more advanced models. While the
major manufacturers of computer products have a policy of providing price
protection to resellers when prices are reduced, on occasion, and particularly
during 1994, manufacturers introduced new models of their products and then
reduced the price of, or discontinued, the older models without price
protection. In these instances, the Company often sells the older models at
reduced prices, which adversely affects gross margin. Additionally,
manufacturers have developed specialized marketing programs designed to improve
or protect the manufacturer's market share. These programs often involve the
granting of rebates to resellers to subsidize sales of computer products at
reduced prices. While these programs generally enhance revenues they also
generally result in lower margins being realized by the reseller. The Company
has participated in a number of these programs in recent years.
Inacom is the largest supplier of products sold by the Company. Purchases
from Inacom accounted for approximately 36.6%, 57.0% and 51.4% of the Company's
total product purchases in 1995, 1996 and 1997, respectively. In August 1996,
the Company renewed its long-term supply arrangement with Inacom and agreed to
purchase at least 80% of its Computer Products from Inacom, but only to the
extent that such products are made available within a reasonable period of time
at reasonably competitive pricing. Inacom does not carry certain product lines
sold by the Company and Inacom may be unable to offer reasonable product
availability and reasonably competitive pricing from time to time on those
product lines that it carries. The Company thus expects that less than 80% of
its total purchases will be made from Inacom, and that any increase or decrease
over historical levels in the percentage of products it purchases from Inacom
under the new Inacom agreement will not have any material impact on the
Company's results of operations.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data derived from the Company's consolidated statements of operations
and indicates the percentage of total revenue for each item.
Year ended December 31,
-----------------------------------------------------------------------
1995 1996 1997
---------------------- --------------------- --------------------
Amount % Amount % Amount %
(Dollars in thousands)
Operating Data(1):
Revenue
Computer Products.............. $81,654 89.6 $107,251 89.1 $111,145 86.0
IT Services.................... 7,900 8.7 7,996 6.6 10,474 8.1
Telecom Systems................ 1,458 1.6 3,824 3.2 5,403 4.2
CTI Software................... 73 1,288 1.1 2,145 1.7
-------- ---- -------- ---- ------- ----
0.1
Total revenue............... 91,085 100.0 120,359 100.0 129,167 100.0
Gross Profit(1)
Computer Products.............. 8,466 10.4 11,172 10.4 11,832 10.7
IT Services.................... 2,404 30.4 3,008 37.6 3,875 37.0
Telecom Systems................ 335 23.0 1,359 35.5 1,412 26.1
CTI Software................... 23 31.5 518 40.2 922 43.0
-------- ---- -------- ---- ------- ----
Total Gross Profit........... 11,228 12.3 16,057 13.3 18,041 13.9
Selling, general and
administrative expenses........ 9,149 10.0 12,284 10.2 14,386 11.1
-------- ---- -------- ---- ------- ----
Operating income............... 2,079 2.3 3,773 3.1 3,655 2.8
Interest expense (net of
other income).................. 1,218 1.3 1,183 1.0 685 .5
-------- ---- -------- ---- ------- ----
Income before provision
for income taxes............. 861 1.0 2,590 0.8 2,970 2.3
Provision for income taxes........ 342 0.4 987 0.8 1,126 0.9
-------- ---- -------- ---- ------- ----
Net income..................... 519 0.6 1,603 1.3 1,844 1.4
======== ==== ======== ==== ======= ====
Per Office Data(1)(2):
Houston Office:
Revenue...................... 53,095 58.3 57,929 48.1 65,614 50.8
Gross profit................. 6,880 13.0 9,470 16.4 9,356 14.3
Dallas Office:
Revenue...................... 37,990 41.7 62,430 51.9 61,698 47.8
Gross profit................. 4,348 11.5 6,587 10.6 8,518 13.8
Austin Office:
Revenue...................... 1,855 1.4
Gross profit................. 167 9.0
(1) Percentages shown are percentages of total revenue, except gross profit
percentage which represent gross profit by each product category as a
percentage of revenue for each such category.
(2) Revenue realized in the McAllen and El Paso offices during 1997 were
insignificant.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Total Revenue. Total revenue increased by $8.8 million (7.3%) from $120.4
million in 1996 to $129.2 million in 1997. Revenue from Computer Products, which
comprised 86.0% of total revenue, increased by $3.9 million (3.6%). The increase
in Computer Products revenue was generally attributable to increased sales to
new and existing customers. Revenue in Computer Products did not grow as
expected in 1997 principally due to insufficient capital resources during the
first half of 1997 and the inability of the newly added sales personnel to
attain the level of revenue production normally expected of new personnel.
Revenue from IT Services increased by $2.5 million (31.0%) from $8.0 million in
1996 to $10.5 million in 1997. The increase was due primarily to sales to new
customers and increases in services provided to existing customers as a result
of customers' increased out-sourcing of their technical support requirements.
Revenue from IT Services as a percentage of total revenue increased from 6.6% in
1996 to 8.1% in 1997 due to the higher growth rate in IT Services revenues
relative to the growth rate of Computer Products revenues in 1997. Revenue from
Telecom Systems, which comprised 4.2% of total revenue, increased by $1.6
million (41.3%). This increase in Telecom Systems revenue was primarily the
result of adding new customers, of which one customer accounted for $1.3 million
(81.2%) of the increase. Sales of CTI Software increased 66.5% from $1.3 million
in 1996 to $2.1 million in 1997. The increased revenues were primarily the
result of sales to new customers.
Gross Profit. Gross profit increased by $2.0 million (12.4%) from $16.0
million in 1996 to $18.0 million in 1997, while gross margin increased from
13.3% in 1996 to 13.9% in 1997. The gross margin for Computer Products increased
from 10.4% in 1996 to 10.7% in 1997, reflecting the continuation of highly
competitive market conditions for Computer Products.
The gross margin from IT Services increased from 37.6% in 1996 to 37.0%
in 1997. This decrease in gross margin was primarily attributable increases,
expressed as a percentage of revenue, in the cost of the billable technical
staff which is due to the relative scarcity of qualified technical staff in the
information technology industry. These cost increases were almost fully offset
by increases in the prices being charged for services which is also due to the
relative scarcity of qualified technical staff in the information technology
industry. In 1996 the Company commenced the implementation of a program to
replace less profitable hardware maintenance and repair services with a variety
of services that were expected to generate higher gross margins. This program
resulted in the elimination of certain IT Services customer relationships which
had been producing lower than average gross margin. The loss of this lower
margin revenue was offset by revenues from new IT Services customers and from
existing customers at higher gross margins.
The gross margin for Telecom Systems sales decreased from 35.5% in 1996
to 26.1% in 1997. In 1997, Telecom Systems bid on and won the installation of
several large systems. As a result of the competitive bidding process employed
by certain customers these large systems were projects which had lower than
normal margins. In addition, gross margin decreased in 1997 due to the purchase
of a large system by a single customer at a lower than usual margin.
CTI Software sales resulted in a gross margin of 43.0% in 1997, an
increase from 40.2% in 1996. This reflected slightly lower, as a percentage of
revenue, installation costs and development costs in 1997 compared to 1996.
Selling, General and Administrative Expenses . Selling, general and
administrative expenses increased by $ 2.1 million (17.1%) from $12.3 million in
1996 to $14.4 million in 1997. As a percentage of total revenue, selling,
general and administrative expenses increased from 10.2% in 1996 to 11.1% in
1997. Of the dollar increase, $1.5 million was attributable to increased
temporary and permanent personnel, principally in non-sales personnel. Other
costs which grew at a rate in excess of the rate of growth in revenues includes
expenses relating to becoming and being a publicly held corporation and
professional fees. The increase as a percentage of total revenue resulted
primarily from increased expenditures for those expenses which do not fluctuate
with gross profit or revenues.
Operating Income. Operating income decreased by $118,000 (3.1 %) from $3.8
million in 1996 to $3.7 million in 1997. Operating income decreased as a
percentage of total revenue from 3.1% in 1996 to 2.8% in 1997 largely due to
increases in selling, general and administrative expenses.
Interest Expense (Net of Other Income). Interest expense (net of other
income) decreased by $498,000 (42.1%). Interest expense decreased due to the
reduction of outstanding debt by applying the proceeds of the Company's initial
public offering to the reduction of debt.
Net Income. Net income, after a provision for income taxes totaling
$1,126,000 ( reflecting an effective tax rate of 37.9% compared to 38.1% in
1996), increased by $241,000 from $1.6 million in 1996 to $1.8 million in 1997.
Net income increased as a percentage of total revenue from 1.3% in 1996 to 1.4%
in 1997.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Total Revenue. Total revenue increased by $29.3 million (32.1%) from
$91.1 million in 1995 to $120.4 million in 1996. Revenue from Computer Products,
which comprised 89.1% of total revenue, increased by $25.6 million (31.3%). The
increase in Computer Products revenue was generally attributable to increased
sales to new and existing customers resulting from the hiring of additional
sales personnel. Revenue from IT Services increased by $96,000 (1.2%) from $7.9
million in 1995 to $8.0 million in 1996. The marginal increase was primarily the
result of the Company's implementation of a program at the beginning of 1996 to
replace less profitable hardware maintenance and repair services with a variety
of services that were expected to generate higher gross margins. This program
resulted in the elimination of certain IT Services customer relationships which
had been producing lower than average gross margin. The loss of this lower
margin revenue was offset, however, by sales to new IT Services customers and to
existing customers, generally at higher gross margins than those earned on sales
to the former customers. Revenue from IT Services as a percentage of total
revenue decreased from 8.7 % in 1995 to 6.6% in 1996 due to both the minimal
growth in IT Services revenues and to growth in the Company's three other
business categories. Revenue from Telecom Systems, which comprised 3.2% of total
revenue, increased by $2.4 million (162.3%). This increase in Telecom Systems
revenue was primarily the result of hiring additional sales personnel and adding
new customers, of which one customer accounted for $699,000 (29.5%) of the
increase, and expanding advertising and marketing efforts. Sales of CTI
Software, which commenced during the fourth quarter of 1995, contributed total
revenue of $1.3 million during 1996, which comprised 1.1% of the Company's total
revenue.
Gross Profit. Gross profit increased by $4.8 million (43.0%) from $11.2
million in 1995 to $16.1 million in 1996, while gross margin increased from
12.3% in 1995 to 13.3% in 1996. The gross margin for Computer Products remained
consistent at 10.4% for both periods. The gross margin from IT Services
increased from 30.4% in 1995 to 37.6% in 1996. As noted above, this increase was
primarily attributable to the replacement of less profitable IT Services
business with more profitable business from new and existing IT Services
customers. The gross margin for Telecom Systems sales increased from 23.0 % in
1995 to 35.5% in 1996. In 1995, Telecom Systems was generally selling products
and services at lower gross margin than in the 1996 period in order to gain
market share during its first year of operation. In addition, gross margin for
Telecom Systems increased in 1996 due to the purchase of a large, complex system
by a single customer at a higher than usual margin. CTI Software sales resulted
in a gross margin of 40.2% in 1996, which was the first full year of operations
for the Company's CTI Software business.
Selling, General and Administrative Expenses . Selling, general and
administrative expenses increased by $ 3.1 million (34.3%) from $9.1 million in
1995 to $12.3 million in 1996. As a percentage of total revenue, selling,
general and administrative expenses increased from 10.0% in 1995 to 10.2% in
1996. Of the dollar increase, $1.2 million was attributable to increased sales
compensation due to increased gross profits and an increase in the number of
sales personnel and $1.0 million was attributable to increases in non-sales
personnel costs. The increase as a percentage of total revenue resulted
primarily from increased gross margins and the related increase in the variable
component of selling, general and administrative expenses that fluctuates with
gross profit, and from the increase in bad debt expense, a portion of which was
due to actual losses and a portion of which was due to increases in reserves for
potential future losses.
Operating Income. Operating income increased by $1.7 million (81.5 %)
from $2.1 million in 1995 to $3.8 million in 1996. Operating income increased as
a percentage of total revenue from 2.3% in 1995 to 3.1% in 1996.
Interest Expense (Net of Other Income). Interest expense (net of other
income) decreased by $35,000 (2.9%). Interest expense remained substantially
unchanged compared to the increase in revenue due to decreased leverage
resulting from increased use of equity and increased asset turns, together with
advance payments for a large purchase by a single customer in 1996. The
prepayments resulted in reduced accounts receivable and a related reduction in
borrowing.
Net Income. Net income, after a provision for income taxes totaling
$987,000 ( reflecting an effective tax rate of 38.1% compared to 39.7% in 1995),
increased by $1.1 million from $519,000 in 1995 to $1.6 million in 1996. Net
income increased as a percentage of total revenue from 0.6% in 1995 to 1.3% in
1996.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last eight quarters and, in the opinion of
management, includes all adjustments (consisting of only normal recurring
adjustments) which the Company considers necessary for a fair presentation of
the information set forth therein. The Company's quarterly results may vary
significantly depending on factors such as the timing of large customer orders,
timing of new product introductions, adequacy of product supply, variations in
the Company's product costs, variations in the Company's product mix, promotions
by the Company, seasonal influences and competitive pricing pressures.
Furthermore, the Company generally experiences a higher volume of orders of
Computer Products in the fourth quarter, which the Company attributes to
year-end capital spending by its customers. Any decrease in the number of
year-end orders experienced by the Company may not be offset by increased
revenues in the Company's first three quarters. The results of any particular
quarter may not be indicative of results for the full year or any future period.
1996 1997
------------------------------------- -------------------------------------
(In thousands, except per share amounts)
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Total Revenue $25,948 $32,202 $29,187 $33,022 $26,593 $32,239 $31,914 $38,423
Cost of sales and service 22,727 28,234 24,669 28,672 22,762 27,312 27,777 33,277
------- ------- ------- ------- ------- ------- ------- -------
Gross Profit 3,221 3,968 4,518 4,350 3,831 4,927 4,137 5,146
Selling, general and
administrative expenses 2,674 2,992 3,319 3,299 3,135 3,839 3,439 3,974
------- ------- ------- ------- ------- ------- ------- -------
Operating Income 547 976 1,199 1,051 696 1,088 698 1,172
Interest expense (net of
other income) 297 285 338 263 289 309 82 5
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes 250 691 861 788 407 779 616 1,167
Provision for income taxes 111 223 362 291 154 310 236 424
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 139 $ 468 $ 499 $ 497 $ 253 $ 469 $ 380 $ 742
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $0.05 $0.17 $0.19 $0.19 $0.09 $0.17 $0.09 $0.17
Liquidity and Capital Resources
Historically, the Company has satisfied its cash requirements principally
through borrowings under its lines of credit and through operations. The Company
maintains a cash position sufficient to pay only its immediately due obligations
and expenses. When the amount of cash available falls below its immediate needs,
the Company requests advances under its credit facility. As the Company's total
revenue has grown, the Company has obtained increases in its available lines of
credit to enable it to finance its growth. The Company's working capital was
$1.7 million, $2.3 million and $12.8 million at December 31, 1995, 1996 and
1997, respectively. The increase in working capital from 1996 to 1997 was
attributable to the receipt of net proceeds from a public offering of the
Company's common stock in July, 1997 and net earnings. As of December 31, 1997,
the Company had total borrowing capacity, based on its collateral base under its
credit facility of approximately $23.8 million versus $18.8 million at December
31, 1996. At December 31, 1997 the Company had unused borrowing capacity of
approximately $18.6 million versus $1.2 million at December 31, 1996.
Cash Flow
Operating activities used net cash totaling $123,000 during 1995 and
provided net cash totaling $89,000 and $2.0 million during 1996 and 1997,
respectively. Net cash used in 1995 was primarily due to working capital
requirements to finance increased accounts receivable and inventory. In 1996,
net cash was provided from operations due primarily to the combined effect of
significantly increased net income, a relatively small year-to-year increase in
accounts receivable and a year-to-year decrease in inventory. During 1997, net
cash was provided from operations due primarily to net income increased levels
of trade accounts payable and accrued expenses which more than offset increases
in accounts receivable.
Trade accounts receivable increased $4.4 million, $695,000 and $7.2
million during 1995, 1996 and 1997, respectively. Inventory increased $21,000 in
1995 and decreased $545,000 and $162,000 in 1996 and 1997, respectively.
Net cash used in operating activities during 1995 of $ 123,000 was net of
an accrual of $1.4 million for a delinquent Texas sales tax liability for the
period June 1995 to November 1995. Interest was accrued on the liability;
however, all penalties were waived by the state. The delinquency resulted from a
programming error in the Company's accounting system that has since been
corrected. In September 1996, the Company paid the state the agreed upon sales
taxes. Had the sales taxes been timely paid, net cash used in operations during
1995 would have been approximately $1.5 million and net cash provided by
operations in 1996 would have been $1.5 million.
Investing activities used cash totaling $458,000, $952,000 and $992,000
during 1995, 1996 and 1997, respectively. The Company's investing activities
that used cash during these periods were primarily related to capital
expenditures. During the next twelve months, the Company expects to incur an
estimated $1.0 million for capital expenditures, a majority of which is expected
to be incurred for leasehold improvements and other capital expenditures in
connection with the planned consolidation of its warehouse facilities into a
single facility in the Dallas-Fort Worth area, the relocation of its Dallas
branch office and the opening of branch offices in McAllen, El Paso and San
Antonio, Texas. All or a portion of the $1.0 million in capital expenditures
currently budgeted by the Company for such purposes are presently expected to be
financed from net cash flow from operations or borrowings under the Company's
line of credit. The actual amount and timing of such capital expenditures may
vary substantially depending upon, among other things, the actual facilities
selected, the level of expenditures required to render the facilities suitable
for the Company's purposes and the terms of lease arrangements pertaining to the
facilities.
Financing activities provided cash totaling $940,000, $63,000 and
$344,000 during 1995 , 1996 and 1997, respectively. In July, 1997, the Company
received $8.7 million net proceeds from the sale of Common Stock in a public
offering. Those proceeds were used to reduce the outstanding balance under the
Company's line of credit. The primary source of cash from financing activities
in other periods has been borrowings on the Company's lines of credit. The lines
of credit have been used principally to finance increases in accounts
receivable.
Asset Management
The Company's cash flow from operations has been affected primarily by
the timing of its collection of trade accounts receivable. The Company typically
sells its products and services on short-term credit terms and seeks to minimize
its credit risk by performing credit checks and conducting its own collection
efforts. The Company had trade accounts receivable, net of allowance for
doubtful accounts, of $15.8 million, $16.5 million and $23.8 million at December
31, 1995, 1996 and 1997, respectively. The number of days' sales outstanding in
trade accounts receivable was 45 days, 40 days and 53 days for years 1995, 1996
and 1997, respectively. The increase in days' sales outstanding was caused by a
general slow down in payments by the Company's customers. To improve this
condition the Company has increased its collection staff and added an
experienced credit manager. Bad debt expense as a percentage of total revenue
for the same periods was 0.1%, 0.2% and 0.2%. The Company's allowance for
doubtful accounts, as a percentage of trade accounts receivable, was 2.8%, 1.3%
and 1.0% at December 31, 1995, 1996 and 1997, respectively.
The Company manages its inventory in order to minimize the amount of
inventory held for resale and the risk of inventory obsolescence and decreases
in market value. The Company attempts to maintain a level of inventory required
to reach only its near term delivery requirements by relying on the ready
availability of products from its principal suppliers. Manufacturers of the
Company's major products generally provide price protection, which reduces the
Company's exposure to decreases in prices. In addition, its suppliers generally
allow for returns of excess inventory, which, on a limited basis, are made
without material restocking fees. Inventory turnover for 1995, 1996 and 1997 was
14.6 times, 19.2 times and 21.5 times, respectively.
Prior Debt Obligations
Throughout 1997, the principal source of liquidity for the Company, in
addition to its cash provided from operations, was its revolving line of credit
with IBMCC (the "IBMCC Facility"). On February 27, 1998 the Company executed
agreements with Deutsche Financial Services ("DFS") for a revolving line of
credit which will replace the IBMCC Facility as the Company's principal source
of liquidity and the IBMCC Facility will be converted into a credit facility for
the purchase of IBM branded computer products. The credits facilities described
herein as the "Old IBMCC Facility" and the "Old DFS Facility" set forth the
provisions of the credit facilities in effect during 1997 and prior periods. The
credit facilities described as the "New DFS Facility" and the "New IBMCC
Facility" set forth the provisions of those facilities after the implementation
of the revolving credit agreement with DFS dated February 27, 1998. The total
credit available under the Old IBMCC Facility was $20.0 million, subject to
borrowing base limitations which were generally computed as a percentage of
various classes of eligible accounts receivable and qualifying inventory.
Borrowings were available under the Old IBMCC Facility for floor plan financing
of inventory from approved manufacturers (the "Old Inventory Line"). Available
credit under the Old IBMCC Facility, net of Inventory Line advances, was used by
the Company primarily to carry accounts receivable and for other working capital
and general corporate purposes (the "Old Accounts Line"). Borrowings under the
Old Accounts Line bore interest at the fluctuating prime rate plus 2.0% per
annum. Under the Old Inventory Line, IBMCC paid the Company's inventory vendors
directly, generally in exchange for negotiated financial incentives. Typically,
the financial incentives received were such that IBMCC does not charge interest
to the Company until approximately 30 days after the transaction is financed, at
which time the Company was required to either pay the full invoice amount of the
inventory purchased from corporate funds or to borrow under the Accounts Line
for the amount due to IBMCC. Inventory Line advances not paid within 30 days
after the financing date bear interest at the fluctuating prime rate plus 6.0%.
IBMCC was permitted to fix a minimum prime rate for the IBMCC Facility of not
less than the average prime rate in effect at the time the minimum prime rate is
set but did not do so. IBMCC was authorized to change, on 30 days notice, the
computation of the borrowing base and to disqualify accounts receivable upon
which advances have been made and require repayment of such advances to the
extent such disqualifications cause the Company's borrowings to exceed the
reduced borrowing base.
The Old IBMCC Facility was collateralized by a security interest in
substantially all of the Company's assets, including its accounts receivable,
inventory, equipment and bank accounts. The Company's Chief Executive Officer
and principal stockholder personally guaranteed the Company's indebtedness to
IBMCC. Collections of the Company's accounts receivable were required to be
applied through a lockbox arrangement to repay indebtedness to IBMCC; however,
IBMCC customarily released a portion of the Company's daily collections to the
extent that they exceed the daily estimated borrowing base.
Through most of 1995, the Company's credit limit under the Old IBMCC
Facility was $15.0 million. From October 1995 through February 1996, IBMCC
extended a temporary increase in the credit limit to $22.5 million and in April
1996 increased the base credit limit to $20.0 million. Effective September 1996,
the Company was notified by IBMCC that it had received further temporary credit
limit adjustments consisting of increases to $30.0 million from September 1996
through February 1997, $28.0 million in March 1997, $25.0 million in April 1997,
and returning to the base limit of $20.0 million thereafter. At December 31,
1997, the total indebtedness of the Company under the Old IBMCC Facility was
$4.3 million of which $1.6 million was outstanding under the Accounts Line and
$1.1 million was outstanding under the Inventory Line. The Company's remaining
available credit at December 31, 1997, based on its borrowing base was
approximately $18.6 million.
The Company had a $3.0 million credit facility with Deutsche Financial
Services (the "Old DFS Facility") for the purchase of inventory from certain
suppliers. From October 1995 through May 1996, the Company received a temporary
increase in the available credit line to $6.0 million and on or about November
15, 1997 this facility was increased to $10.0 million in anticipation of
increased usage of this facility for inventory purchases. As in the case of the
Old IBMCC Inventory Line, advances under the Old DFS Facility were typically
interest free for 30 days after the financing date for transactions in which
adequate financial incentives are received by DFS from the vendor. Within 30
days after the financing date, the full invoice amount for inventory financed
through DFS is required to be paid by the Company. On or about November 15, 1997
DFS extended to interest free period for advances under the Old DFS Facility to
40 days. Amounts remaining outstanding thereafter bear interest at the
fluctuating prime rate (but not less than 6.5%) plus 6.0%. DFS retains a
security interest in the inventory financed. The Old DFS Facility is immediately
terminable by either party by written notice to the other. At December 31, 1997,
the amount outstanding under the DFS Facility was $9.4 million.
The Company was required to comply with certain key financial and other
covenants under the Old IBMCC Facility and Old DFS Facility. During 1994 and
1995 and the first seven months of 1996, the Company was in default of certain
financial covenants and certain other covenants under the Old IBMCC Facility and
Old DFS Facility. For example, the Company was required under the Old IBMCC
Facility to maintain during 1995 the following financial ratios: net profits
after taxes to revenue of at least 0.5%; annualized revenues to working capital
of more than zero but no greater than 35.0 to 1; and total liabilities to
tangible net worth of more than zero but no more than 12.0 to 1. The ratios
actually attained by the Company for the year ended December 31, 1995, were
approximately 0.57%, 43.9 to 1 and 12.7 to 1, respectively. The Old DFS
Facility, for instance, requires that at all times the Company's indebtedness
for borrowed money and capital lease obligations divided by its tangible net
worth plus subordinated debt not exceed 8.0 to 1, but at June 30, 1996, the
actual ratio attained by the Company was approximately 9.18 to 1. In addition to
financial ratio covenants, the Company has violated other covenants under both
credit facilities, including timely filing of periodic financial reports and
covenants prohibiting certain transactions with subsidiaries and other
affiliates. IBMCC and DFS have, however, waived defaults when requested by the
Company from time to time. Most recently, IBMCC and DFS waived certain defaults
in August 1996 through December 31, 1996. Additionally, both lenders liberalized
certain financial covenants in connection with their waivers. DFS increased the
maximum permitted ratio for indebtedness for borrowed money plus capital lease
obligations to tangible net worth plus subordinated debt to 9.5 to 1 through
December 31, 1996, reverting to 8.0 to 1 thereafter. IBMCC increased the maximum
permissible ratio of annualized revenue to working capital to 56.0 to 1 through
1996 and to 52.0 to 1 thereafter, reserving the right to further change the
ratio upon notice to the Company. Throughout 1997, the Company was in compliance
with the key financial and other covenants under both the Old IBMCC Facility and
the Old DFS Facility.
New Credit Facilities.
The total credit available under the New DFS Facility is $30.0 million,
subject to borrowing base limitations which are generally computed as a
percentage of various classes of eligible accounts receivable and qualifying
inventory. Credit available under the New DFS Facility for floor plan financing
of inventory from approved manufacturers (the "Inventory Line") is $20.0
million. Available credit under the New DFS Facility, net of Inventory Line
advances, is $10.0 million, which is used by the Company primarily to carry
accounts receivable and for other working capital and general corporate purposes
(the "Accounts Line"). Borrowings under the Accounts Line bear interest at the
fluctuating prime rate minus 1.0% per annum. Under the Inventory Line, DFS pays
the Company's inventory vendors directly, generally in exchange for negotiated
financial incentives. Typically, the financial incentives received are such that
DFS does not charge interest to the Company until 40 days after the transaction
is financed, at which time the Company is required to either pay the full
invoice amount of the inventory purchased from corporate funds or to borrow
under the Accounts Line for the amount due to DFS. Inventory Line advances not
paid within 40 days after the financing date bear interest at the fluctuating
prime rate plus 5.0%. For purposes of calculating interest charges the minimum
prime rate under the New DFS Facility is 7.00%. DFS may change the computation
of the borrowing base and to disqualify accounts receivable upon which advances
have been made and require repayment of such advances to the extent such
disqualifications cause the Company's borrowings to exceed the reduced borrowing
base.
The New DFS Facility is collateralized by a security interest in
substantially all of the Company's assets, including its accounts receivable,
inventory, equipment and bank accounts. Collections of the Company's accounts
receivable are required to be applied through a lockbox arrangement to repay
indebtedness to DFS; however, DFS has amended the lockbox agreement to make such
arrangements contingent upon certain financial ratios. Provided the Company is
in compliance with its debt to tangible net worth covenant, the Company has
discretion over the use and application of the funds collected in the lockbox.
If the Company exceeds that financial ratio, DFS may require that lockbox
payments be applied to reduce the Company's indebtedness to DFS. If in the
future DFS requires that all lockbox payments be applied to reduce the Company's
indebtedness, the Company would be required to seek funding from DFS or other
sources to meet substantially all of its cash needs.
Effective with the implementation of the New DFS Facility the Company
will have a $2.0 million credit facility with IBMCC (the "New IBMCC Facility")
for the purchase of IBM branded inventory from certain suppliers. As in the case
of the Old IBMCC Inventory Line, advances under the New IBMCC Facility are
typically interest free for 30 days after the financing date for transactions in
which adequate financial incentives are received by IBMCC from the vendor.
Within 30 days after the financing date, the full invoice amount for inventory
financed through IBMCC is required to be paid by the Company. Amounts remaining
outstanding thereafter bear interest at the fluctuating prime rate (but not less
than 6.5%) plus 6.0%. IBMCC retains a security interest in the inventory
financed. The New IBMCC Facility is immediately terminable by either party by
written notice to the other.
Under the New DFS Facility the Company is required to maintain (i) a
tangible net worth of $10.0 million, (ii) a ratio of debt minus subordinated
debt to tangible net worth of 4 to 1 and (iii) a ratio of current tangible
assets to current liabilities of not less than 1.4 to 1. The covenants under the
New IBMCC Facility remain unchanged from the Old IBMCC Facility.
Both the IBMCC Facility and the DFS Facility prohibit the payment of
dividends unless consented to by the lender.
Year 2000 Compliance
During the first quarter of 1998 the Company commenced a conversion of
it MIS to a more powerful computing platform which will allow the Company to
improve and enhance its MIS. The new system will allow the Company to expand it
uses and more fully integrate its operations with the MIS. While the Company
expects the system conversion to be fully implemented with only normal debugging
and reprogramming, a failure to fully implement the conversion with only minimal
disruption of its operation could have an adverse effect on the Company's
results of operations and financial condition.
The system conversion was implemented as a general upgrading of the
Company's MIS and was not for the purpose of achieving Year 2000 compliance. The
Company believes its prior MIS was, and its new MIS is, Year 2000 compliant.
Accordingly, the Company does not believe that Year 2000 compliance will have a
material adverse effect on its results of operations or financial condition. It
is possible that the Company could be impacted if its significant suppliers or
customers do not successfully and timely achieve Year 2000 compliance with
respect to their own computer systems. The Company has inquired of its two major
suppliers as to the status of their Year 2000 compliance and has been advised
that they expect to achieve Year 2000 compliance. If, contrary to the Company's
expectations, it or the significant suppliers and customers fail to achieve Year
2000 compliance in a timely manner, the Company's results of operations and
financial condition could be materially and adversely effected.
Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying of
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 130 and 131 are effective for periods beginning after December 15,
1997. These two statements will not have any effect on the Company's 1997
financial statements, however, management is evaluating what, if any additional
disclosures may be required when these two statements are implemented.
Item 7A. Quantitative and Qualitative disclosures about Market Risk.
This item is inapplicable to the Company.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Independent Auditor's Report............................................. 27
Consolidated Balance Sheets as of December 31, 1996 and 1997........... 28
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997..,,................................. 29
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997............................... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997..................................... 31
Notes to Consolidated Financial Statements for the years
ended December 31, 1995, 1996 and 1997............................... 32
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Allstar Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Allstar
Systems, Inc. and subsidiaries ("Allstar") at December 31, 1996 and 1997, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of Allstar's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Allstar at December 31, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Houston, Texas
March 27, 1998
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
In thousands, except share and per shares amounts)
ASSETS 1996 1997
---- ----
Current Assets:
Cash and cash equivalents:
Restricted cash $ 94 $ 280
Cash 135 1301
----------- -----------
Total cash and cash equivalents 229 1,581
Accounts receivable - trade, net 16,517 23,759
Accounts receivable - affiliates 140 434
Inventory 4,862 4,700
Deferred taxes 350 212
Deferred offering costs 412
Other current assets 174 404
----------- -----------
Total current assets 22,684 31,090
Property and equipment, net 1,644 2,013
Other assets 392 81
----------- -----------
$ 24,720 $ 33,184
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 9,975 $ 1,572
Accounts payable 7,157 12,805
Accrued expenses 2,759 3,565
Income taxes payable 206 82
Deferred service revenue 296 242
----------- -----------
Total current liabilities 20,393 18,266
Deferred credit - Stock warrants 195
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
no shares issued
Common stock, $.01 par value, 50,000,000 shares authorized, 2,675,000 and
4,454,411 outstanding at December 31,
1996 and 1997, respectively 27 45
Additional paid in capital 1,479 10,013
Retained earnings 2,821 4,665
----------- -----------
Total stockholders' equity $ 4,327 $ 14,723
------------ -----------
$ 24,720 $ 33,184
=========== ===========
See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands, except share and per shares amounts)
Years ended December 31, .
1995 1996 1997
Total revenue .................................................. $ 91,085 $ 120,359 $ 129,167
Cost of goods and services ..................................... 79,857 104,302 111,126
---------- ---------- ----------
Gross profit ................................. 11,228 16,057 18,041
Selling, general and administrative expenses ................... 9,149 12,284 14,386
---------- ---------- ----------
Operating income ............................................... 2,079 3,773 3,655
Interest expense and other ..................................... 1,218 1,183 685
---------- ---------- ----------
Income before provision for income taxes ....................... 861 2,590 2,970
Provision for income taxes ..................................... 342 987 1,126
---------- ---------- ----------
Net income ..................................................... $ 519 $ 1,603 $ 1,844
========== ========== ==========
Net income per share:
Basic ................................................. $ 0.19 $ 0.60 $ 0.52
========== ========== ==========
Diluted ............................................... $ 0.19 $ 0.60 $ 0.52
========== ========== ==========
Weighted average number of shares outstanding:
Basic ................................................. 2,675,000 2,675,000 3,519,821
========== ========== ==========
Diluted ............................................... 2,675,000 2,675,000 3,526,787
========== ========== ==========
See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
1995, 1996 AND 1997 (In thousands, except share and per shares amounts)
$.01 Par value No Par Value Additional
Common Stock Common Stock Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
BALANCE AT JANUARY 1, 1995 328,125 $ 2 $ 1,504 $ 699 $ 2,205
Net income 519 519
---------- ------ ------------ ---------- ---------
BALANCE AT DECEMBER 31, 1995 328,125 2 1,504 1,218 2,724
Issuance of common stock
on conversion (see Note 1) 2,675,000 $ 27 (328,125) (2) (25)
Net income 1,603 1,603
---------- ----- ---------- ------ ------------ ---------- ---------
BALANCE AT DECEMBER 31, 1996 2,675,000 27 1,479 2,821 4,327
Sale of common stock, net of initial
public offering expenses of $2,040 1,765,125 18 8,448 8,466
Issuance of restricted stock 14,286 86 86
Net income 1,844 1,844
---------- ----- ---------- ------ ------------ ---------- ---------
BALANCE AT DECEMBER 31, 1997 4,544,411 $ 45 $ $ 10,013 $ 4,665 $ 14,723
========== ===== ========== ===== ============ ========== ========
See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995,
1996 AND 1997 (In thousands, except share and per shares amounts)
Years ended December 31,
1995 1996 1997
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income .......................................................... $ 519 $ 1,603 $ 1,844
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on disposal of assets .......................................... (1) (11)
Depreciation and amortization ....................................... 309 305 623
Deferred tax provision .............................................. (146) (92) 138
Changes in assets and liabilities that provided (used) cash:
Accounts receivable - trade, net ........................... (4,437) (695) (7,242)
Accounts receivable - affiliates ........................... (80) 153
(294)
Inventory .................................................. (21) 545 162
Other current assets ....................................... 4 (507) (230)
Other assets ............................................... 311
Accounts payable ........................................... 1,977 (492) 6,060
Accrued expenses ........................................... 1,673 (598) 806
Income taxes payable ....................................... 53 (77) (124)
Deferred service revenue ................................... 27 (45) (54)
------- ------- -------
Net cash provided by (used in) operating activities (123) 89 2,000
CASH FLOWS FROM INVESTING ACTIVITES:
Capital expenditures ................................................ (518) (965) (992)
Proceeds from sale of fixed assets .................................. 60 13
------- ------- -------
Net cash used in investing activities (458) (952) (992)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable 940 63 (8,403)
Net proceeds from sale of common stock 8,747
------- ------- -------
Net cash provided from financing activities 940 63 344
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 359 (800) 1,352
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 670 1,029 229
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,029 $ 229 $ 1,581
======= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,189 $ 1,140 $ 958
========= ======== =========
Cash paid for income taxes $ 432 $ 1,138 $ 1,032
========= ======== =========
See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1995, 1996 AND 1997 (In thousands, except share and per shares amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Allstar Systems, Inc. and subsidiaries ("Allstar"') is engaged in the sale
and service of computer and telecommunications hardware and software products.
During 1995 Allstar formed and incorporated Stratasoft, Inc., a wholly owned
subsidiary, to create and market software related to the integration of computer
and telephone technologies. In January, 1997 Allstar formed IT Staffing Inc. to
provide temporary and permanent placement services of technical personnel. All
operations of the business are conducted from offices located in Texas.
A substantial portion of Allstar's sales and services are authorized under
arrangements with product manufacturers and Allstar's operations are dependent
upon maintaining its approved status with such manufacturers. As a result of
these arrangements and arrangements with its customers, gross profit could be
limited by the availability of products or allowance for volume discounts.
Furthermore, net income before income taxes could be affected by changes in
interest rates which underlie the credit arrangements which are used for working
capital (see Note 5).
Allstar's significant accounting policies are as follows:
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Allstar Systems, Inc. and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Inventory - Inventory consists primarily of personal computers and
components and is valued at the lower of cost or market with cost determined on
the first-in first-out method. Management provides a reserve for inventory which
may be slow-moving or obsolete.
Property and Equipment - Property and equipment are recorded at cost.
Expenditures for repairs and maintenance are charged to expense when incurred,
while expenditures for betterments are capitalized. Disposals are removed at
cost less accumulated depreciation with the resulting gain or loss reflected in
operations in the year of disposal.
Property and equipment are depreciated over their estimated useful lives
ranging from five to ten years using the straight-line method. Depreciation
expense totaled $307, $303 ,and $623 for the years ended December 31, 1995, 1996
and 1997, respectively.
Impairment of Long-Lived Assets -Allstar records impairment losses on
long-lived assets, including goodwill, used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets.
Federal Income Taxes - Deferred taxes are provided at enacted rates for the
temporary differences between the financial reporting bases and the tax bases of
assets and liabilities.
Earnings per Share - Net earnings per share of common stock are based on
the weighted average number of shares of common stock and common stock
equivalents, if any, outstanding during each period. In October 1996, the
Company completed a reincorporation in order to change its state of domicile to
Delaware, to authorize 50,000,000 shares of $.01 par value common stock and to
authorize 5,000,000 shares of $.01 par value preferred stock. The
reincorporation had the effect of an 8.15-for-1 split of Allstar's common stock.
All applicable share and per share data in the consolidated financial statements
and related notes give effect to this reincorporation and resulting stock
conversion.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 requires a dual presentation of basic and diluted earnings per
share for entities with complex capital structures. At December 31 1995 and
1996, Allstar had no stock options or similar equity instruments outstanding
accordingly SFAS No. 128 had no retroactive effect on the consolidated financial
statement for the years then ended. During 1997 Allstar granted options to
purchase 200,300 shares, issued 14,286 shares of restricted stock and issued
warrants to purchase 176,750 common shares at $9.60 per share to underwriters in
connection with a public offering of the common stock. If Allstar had adopted
the statement in prior years, earnings per share would have been as follows:
1997 1996 1995
---- ---- ----
Basic......................................$0.52 $0.60 $0.19
Diluted....................................$0.52 $0.60 $0.19
Revenue Recognition - Revenue from the sale of computer products is
recognized when the product is shipped. Service income is recognized ratably
over the service contract life. Revenues resulting from installations of
equipment for which duration is in excess of three months are recognized using
the percentage-of-completion method. The percentage of revenue recognized on
each contract is based on the most recent cost estimate available. Revisions of
estimates are reflected in the period in which the facts necessitating the
revision become known; when a contract indicates a loss, a provision is made for
the total anticipated loss. At December 31, 1996 Allstar had no such contracts
in process. At December 31, 1997, Allstar had $868 of such contracts in progress
and $401 of revenue has been deferred together with $197 of costs related to
those revenues.
Research and Development Costs - Expenditures relating to the development
of new products and processes, including significant improvements and
refinements to existing products, are expensed as incurred. The amounts charged
to expense were $13, $96 and $157 in the years ended December 31, 1995, 1996 and
1997, respectively.
Fair Value of Financial Instruments - Allstar's financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable and
notes payable for which the carrying values approximate fair values given the
short-term maturity of the instruments. It is not practicable to estimate the
fair values of related-party receivables due to the nature of the instruments.
Cash and Cash Equivalents - Cash and cash equivalents include any highly
liquid debt instruments with a maturity of three months or less when purchased.
See Note 5 for discussion of restricted cash.
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Accounting Pronouncements - In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 130 establishes standards for
reporting and displaying of comprehensive income and its components. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments and related information in interim and
annual financial statements. SFAS No. 130 and 131 are effective for fiscal years
beginning after December 15, 1997. These two statements will not have any effect
on the Company's 1997 financial statements, however, management is evaluating
what, if any additional disclosures may be required when these two statements
are implemented.
Reclassifications - The accompanying consolidated financial statements for
the years presented have been reclassified to give retroactive effect to certain
changes in presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1996 and
1997:
1996 1997
Trade.................................... $16,736 $24,008
Allowances for doubtful accounts......... (219) (249)
------- -------
Total............................... $16,517 $23,759
======= =======
3. DEFERRED OFFERING COSTS
Deferred offering costs represent amounts incurred by Allstar through
December 31, 1996 in preparation of filing an offering document. Allstar
completed a public offering of its common stock in 1997 and the deferred
offering costs were included as a cost of issuance of the common stock.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996 and
1997:
1996 1997
Equipment............................. $ 282 $ 339
Computer equipment.................... 1,964 2,870
Furniture and fixtures 294 316
Leasehold improvements 47 55
Vehicles 105 105
------- -------
$ 2,692 3,685
Accumulated depreciation and amortization (1,048) (1,672)
------- -------
Total $ 1,644 $ 2,013
======= =======
5. CREDIT ARRANGEMENTS
Allstar had two revolving lines of credit with a commercial finance company
which were collateralized by substantially all of Allstar's assets and a
personal guarantee of the principal stockholder of Allstar. The aggregate
maximum combined lines of credit were $20.0 million and $30.0 million at
December 31, 1996 and 1997, respectively. The maximum combined credit limit was
subject to borrowing base limitations which were generally computed as a
percentage of various classes of eligible accounts receivable and qualifying
inventory (as defined). Allstar paid an annual facility fee of $18,000.
Under the first revolving line of credit (the "Accounts Line"), outstanding
principal and interest were due upon termination of the agreement. Transactions
on the Accounts Line are reflected as Notes Payable in the consolidated
financial statements. The Accounts Line accrued interest at the prime rate plus
2% (10.25% at December 31, 1996 and 10.50% at December 31, 1997). The agreement
required that all payments received from customers on pledged accounts
receivable be applied to the outstanding balance on the Accounts Line.
Accordingly, accounts receivable payments received in the amount of $94 and $280
at December 31, 1996 and 1997, respectively, but not yet applied to the line of
credit, are shown as restricted cash in the accompanying balance sheets. The
weighted average interest rate on the Accounts Line for the years ended December
31, 1995, 1996 and 1997 was 12.84%, 10.25% and 10.50%, respectively.
The second revolving line of credit (the "Inventory Line") was used by
Allstar to floor plan inventory purchases. At December 31, 1996 and December 31,
1997, aggregate borrowings on the Inventory Line were $6,134 and $1,089,
respectively. Interest accrues at the prime rate plus 6% (14.50% at December 31,
1997) for all outstanding balances over 30 days.
On March 27, 1998, Allstar and the commercial finance company terminated
their credit arrangement and entered into a new $2.0 million revolving credit
line of credit to floor plan inventory. This line of credit accrues interest at
prime plus 6% (14.50% at December 31, 1997) for all outstanding balances over 30
days.
In addition, Allstar had a $10.0 million ($3.0 million at December 31,
1996) credit line with another financing company to be used to floor plan
inventory purchases. At December 31, 1996 and December 31, 1997, aggregate
borrowings on this line were $993 and $9,391, respectively. Interest accrues at
the prime rate, which for purposes of this agreement will not fall below 6.5%,
plus 6% (14.50% at December 31, 1997) for all outstanding balances over 30 days.
Amounts borrowed under the Inventory Line and the $3.0 million line of
credit (collectively the "Floor Plan Agreements") are included in accounts
payable in the consolidated financial statements. Under the Floor Plan
Agreements the financing companies pay Allstar's suppliers directly and maintain
a purchase money security interest in the related inventory. Allstar incurred
interest expense under the Floor Plan Agreements of $35, $59 and $4 during the
years ended December 31, 1995, 1996 and 1997, respectively. The Floor Plan
Agreements require payment of interest on a monthly basis and principal on
demand.
The combined borrowing base under all credit arrangements was $18,841 and
$23,871 at December 31, 1996 and 1997, respectively.
New Credit Facilities.
On February 27, 1998 Allstar entered into a new credit agreement with a
commercial finance company.. The total credit available under the new credit
facility is $30.0 million, subject to borrowing base limitations which are
generally computed as a percentage of various classes of eligible accounts
receivable and qualifying inventory. Credit available under the new facility for
floor plan financing of inventory from approved manufacturers (the "Inventory
Line") is $20.0 million. Available credit under the new facility, net of
Inventory Line advances, is $10.0 million, which is used by the Company
primarily to carry accounts receivable and for other working capital and general
corporate purposes (the "Accounts Line"). Borrowings under the Accounts Line
bear interest at the fluctuating prime rate minus 1.0% per annum. Under the
Inventory Line interest accrues at prime rate, which for purposes of this
agreement will not fall below 7.0%, plus 5% for outstanding balances over 40
days.
This agreement, which continues in full force and effect for 36 months or
until terminated by 30 day written notice from the lender and may be terminated
upon 90 days notice by Allstar, subject to a termination fee, is collateralized
by substantially all of Allstar's assets. The credit facility is not guaranteed
by the principal stockholder of Allstar. The agreement contains restrictive
covenants which, among other things, require specific ratios of revenue to
working capital, total liabilities to tangible net worth and net profit after
tax to revenue. The terms of the agreement also prohibit the payment of
dividends, the purchase of Allstar common stock and other similar expenditures,
including advances to related parties.
6. INCOME TAXES
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997 consisted of the following:
1995 1996 1997
---- ---- ----
Current Provision (benefit)
Federal..................... $ 446 $ 962 $ 848
State......................... 42 117 140
------ ------ ------
Total current provision.......... 488 1,079 988
Deferred Provision............... (146) (92) 138
------ ------ ---
Total........................ $ 342 $ 987 $1,126
====== ===== =====
The total provision for income taxes during the years ended December 31,
1995, 1996 and 1997 varied from the U.S. federal statutory rate due to the
following:
1995 1996 1997
---- ---- ----
Federal income tax at statutory rate.. $ 301 $ 907 $1,010
Nondeductible expenses.............. 48 17 24
State income taxes.................. 28 77 92
Other............................... (35) (14)
------ ------ ------
Total............................. $ 342 $ 987 $1,126
====== ====== ======
Deferred tax assets computed at the statutory rate related to temporary
differences at December 31, 1996 and December 31, 1997 were as follows:
December 31 December 31,
1996 1997
Deferred tax assets:
Accounts receivable.................. $ 142 $ 149
Deferred service revenue............. 69 41
Inventory............................ 139 22
------ -------
Total deferred tax assets......... $ 350 $ 212
====== ======
7. ACCRUED EXPENSES
Accrued liabilities consisted of the following as of December 31, 1996 and
1997:
1996 1997
---- ----
Sales tax payable $1,309 $1,922
Accrued employee benefits, payroll
and other related costs 996 962
Accrued interest 209 47
Other 245 634
Total $2,759 $3,565
====== ======
8. FRANCHISE FEES
Allstar entered into an agreement in May 1989 whereby it became a franchise
of Inacom Corp. ("Inacom"). Annual fees, amounting to 0.05% of certain gross
sales, were expensed in the period incurred. Allstar obtained a waiver effective
January 1, 1995 which eliminated the payment of franchise fees.
Allstar entered into an agreement in August 1996 in which Allstar is
required to purchase at least 80% of its computer products from Inacom if such
are available within a reasonable period of time at reasonably competitive
prices. The agreement expires on December 31, 2001 and automatically renews for
successive one-year periods. A cancellation fee of $571 will be payable by
Allstar in the event of non-renewal or early termination of the agreement by
either party; however, Allstar does not anticipate termination to occur by
either party prior to the initial termination date. Allstar is accruing this
cancellation fee over the initial agreement period by an approximate $9 monthly
charge to earnings. For the years December 31, 1995, 1996 and 1997, Allstar
charged to expense $0, $44 and $105, respectively, related to this agreement.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases - Allstar subleases office space from Allstar Equities,
Inc. ("Equities"), a company wholly owned by the principal stockholder of
Allstar. In 1996, Allstar renewed its office sublease with monthly rental
payments of $31.5 in 1997 and $32 in 1998, plus certain operating expenses
through December 1998. Rental expense under this agreement amounted to
approximately $372, $372 and $378 during years ended December 31, 1995, 1996 and
1997, respectively.
Additionally, minimum annual rentals at December 31, 1996 on other
operating leases amount to approximately $126 for 1998, $63 in 1999, and $8 in
2000. Amounts paid during the years ended December 31, 1995, 1996 and 1997 under
such agreements totaled approximately $137, $252 and $142, respectively.
Benefit Plans - Allstar maintains a group medical and hospitalization
insurance program under which Allstar pays employees' covered health care costs.
Any claims exceeding $30 per employee or a cumulative maximum of approximately
$180 per year are insured by an outside insurance company. Allstar's claim and
premium expense for this self-insurance program totaled approximately $67, $193
and $684 for the years ended December 31, 1995, 1996 and 1997, respectively.
Allstar maintains a 401(k) savings plan. All full-time employees who have
completed 90 days of service with Allstar are eligible to participate in the
plan. Allstar also has the option of making additional contributions based on
net profitability. Declaration of such contributions is at the discretion of
Allstar's Board of Directors. Allstar made no additional contributions to the
plan for the years ended December, 1995 and 1997. In 1996 Allstar contributed
$136 to the plan.
Allstar has filed under the Internal Revenue Service Walk-in Closing
Agreement Program (the "Program") to negotiate a settlement regarding the
qualified status of the 401(k) savings plan in order to meet the requirements of
Section 401(a) of the Internal Revenue Code. Under the Program, any sanction
amount negotiated is based upon the total tax liability which could be assessed
if the plan were to be disqualified. At December 31, 1997 the Company has
accrued $28 for the estimated settlement cost. In 1998, the Internal Revenue
Service accepted the settlement and the Company paid $25.
On July 13, 1996, a former customer brought suit against the Company in the
152nd Judicial District Court of Harris County, Texas. The plaintiff alleges
that the Company failed to provide and complete promised installation and
configuration of certain computer equipment within the time promised by the
Company. Based on these allegations, the plaintiff is suing for breach of
contract and other statutory violations and is seeking actual monetary damages
of approximately $3 million and treble damages under the Texas Deceptive Trade
Practices Act. The Company is unable to estimate the range of possible recovery
by the plaintiff because the suit is still in the early stages of discovery.
However, the Company is vigorously defending the action. The effect of an
unfavorable outcome could have a material adverse effect on the Company's
results of operations and its financial condition.
Allstar is party to other litigation and claims which management believes
are normal in the course of its operations; while the results of such litigation
and claims cannot be predicted with certainty, Allstar believes the final
outcome of such matters will not have a materially adverse effect on its results
of operations or financial position.
10. STOCK OPTION PLANS
In September 1996 Allstar adopted the 1996 Incentive Stock Plan (the
"Incentive Plan") and the 1996 Non-Employee Director Stock Option Plan (the
"Director Plan"). Under the Incentive Plan, Allstar's Compensation Committee may
grant up to 417,500 shares of common stock, which have been reserved for
issuance, to certain key employees of Allstar. The Incentive Plan provides for
the granting of incentive awards in the form of stock options, restricted stock,
phantom stock, stock bonuses and cash bonuses in accordance with the provisions
of the plan. Additionally, no shares may be granted after the tenth anniversary
of the Incentive Plan's adoption. Allstar has reserved for issuance, under the
Director Plan, 100,000 shares of common stock, subject to certain antidilution
adjustments. The Director Plan provides for a one-time option by newly elected
directors to purchase up to 5,000 common shares, after which each director is
entitled to receive an option to purchase up to 2,000 common shares upon each
date of re-election to Allstar's Board of Directors. Options granted under the
Director Plan have an exercise price equal to the fair market value on the date
of grant and generally expire ten years after the grant date. During 1997
Allstar granted options to purchase 200,300 common shares to its directors,
officers and employees.
The plans activity is summarized below:
1997
Weighted
Average
Exercise
Shares Price
Options outstanding at January 1....... 0 $ 0.00
Granted during the year................ 200,300 5.17
Exercised during the year.............. 0 0.00
Canceled during the year............... 0 0.00
------- ----------
Options outstanding at December 31..... 200,300 $ 5.17
======= ==========
Options exercisable at December 31..... 0 $ 5.17
======= ==========
Options outstanding price range........ $4.625 to $6.00
Option weighted average remaining life. 9.7 Years
Allstar applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for options granted under
the Plans. Accordingly, no compensation expense has been recognized. Had
compensation expense been recognized based on the Black-Scholes option pricing
model value at the grant date for awards consistent with SFAS no. 123
"Accounting for stock-Based Compensation, ." For purposes of estimating the fair
value disclosures below, the fair value of each stock option has been estimated
on the grant date with a Black-Scholes option-pricing model using the following
weighted-average assumptions: dividend yield of 0%; expected volatility of
76.2%; risk-free interest rate of 6.0%; and expected lives of 10 years of stock
options granted. The effects of using the fair value method of accounting on net
income and earnings per share are indicated in the pro forma accounts below:
Net Income:
As Reported.......................................... $ 1,844
Pro forma............................................ $ 1,815
Earnings per share (Basic)
As reported.......................................... $ 0.52
Pro forma............................................ $ 0.52
Earnings per share (Diluted)
As reported.......................................... $ 0.52
Pro forma............................................ $ 0.51
11. RELATED-PARTY TRANSACTIONS
Allstar has from time to time made payments on behalf of Equities and the
Company's principal stockholders for taxes, property and equipment. Effective
July 1, 1996, Allstar and its principal stockholder entered into a promissory
note to repay certain advances, which were approximately $173 at July 1, 1996,
in equal annual installments of principal and interest, from August 1997 through
2001. This note bears interest at 9% per year. Also effective July 1, 1996,
Allstar and Equities entered into a promissory note whereby Equities would repay
the balance of amounts advanced, which were approximately $387 at July 1, 1996,
in monthly installments of $6.5, including interest, from July 1996 through
November 1998 with a final payment of $275 due on December 1, 1998. This note
bears interest at 9% per year. The principal amounts as of December 31, 1996 are
classified as Accounts receivable - affiliates and Other assets based on the
repayment terms of the promissory notes. The principal amounts as of December
31, 1997 are classified as Accounts receivable - affiliates based on the
expectation of repayment within one year. At December 31, 1996 and December 31,
1997, Allstar receivables from these affiliates amounted to approximately $501
and $434, respectively.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
NONE
PART III.
Item 10-13
The Registrant incorporates the information required by Form 10-K,
Items 10 through 13 by reference to the Company's definitive proxy statement for
its 1998 Annual Meeting of Shareholder which will be filed with the Commission
prior to April 30, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a (1) Consolidated Financial Statements - See Index to Consolidated Financial
Statements on Page 27
(2) Consolidated Financial Statements Schedule II Valuation and Qualifying
Accounts Exhibit 99.1
(3) Exhibits
3. Exhibits
Filed Herewith
Exhibit or Incorporated by
Number Description Reference to:
2.1 Plan and Agreement of Merger by and Between Exhibit 2.1 to Form
Allstar Systems, Inc, a Texas corporation and S-1 filed Aug. 8, 1996
Allstar Systems, Inc. a Deleware corporation
3.1 Bylaws of the Company Exhibit 3.1 to Form
S-1 filed Aug. 8, 1996
3.2 Certificate of Incorporation of the Company Exhibit 3.2 to Form
S-1 filed Aug. 8, 1996
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Form
S-1 filed Aug. 8, 1996
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of Exhibit 4.2 to Form
Incorporation and Bylaws of the Company defining the rights of the S-1 filed Aug. 8, 1996
holders of Common Stock.
10.1 Revolving Loan and Security Agreement by and between Exhibit 10.1 to Form
IBM Credit Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.2 Agreement for Wholesale Financing dated September 20, 1993, by Exhibit 10.2 to Form
and between ITT Commercial Finance Corp. and Allstar-Valcom, Inc. S-1 filed Aug. 8, 1996
10.3 Amendment to Agreement for Wholesale Financing dated Exhibit 10.3 to Form
October 25, 1994, by and between ITT Commercial Finance Corp. S-1 filed Aug. 8, 1996
and Allstar Systems, Inc.
10.4 Sublease Agreement by and between Allstar Equities and Allstar Exhibit 10.4 to Form
Systems, Inc. S-1 filed Aug. 8, 1996
10.5 Form of Employment Agreement by and between the Company and Exhibit 10.5 to Form
certain members of Management. S-1 filed Aug. 8, 1996
10.6 Employment Agreement dated September 7, 1995, by and between Exhibit 10.6 to Form
Stratasoft, Inc. and William R. Hennessy. S-1 filed Aug. 8, 1996
10.7 Assignment of Certain Software dated September 7, 1995, by Exhibit 10.7 to Form
International Lan and Communications, Inc. and Aspen System S-1 filed Aug. 8, 1996
Technologies, Inc. to Stratasoft, Inc.
10.8 Microsoft Solution Provider Agreement by and between Microsoft Exhibit 10.8 to Form
Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.9 Novell Platinum Reseller Agreement by and between Novell, Inc. Exhibit 10.9 to Form
and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.10 Allstar Systems, Inc. 401(k) Plan. Exhibit 10.10 to Form
S-1 filed Aug. 8, 1996
10.11 Allstar Systems, Inc. 1996 Incentive Stock Plan. Exhibit 10.11 to Form
S-1 filed Aug. 8, 1996
10.12 Allstar Systems, Inc. 1996 Non-Employee Director Stock Option Plan. Exhibit 10.12 to Form
S-1 filed Aug. 8, 1996
10.13 Primary Vendor Volume Purchase Agreement dated August 1, 1996 by Exhibit 10.13 to Form
and between Inacom Corp. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.14 Resale Agreement dated December 14, 1995, by and between Ingram Exhibit 10.14 to Form
Micro Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.15 Volume Purchase Agreement dated October 31, 1995, by and between Exhibit 10.15 to Form
Tech Data Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.16 Intelligent Electronics Reseller Agreement by and between Intelligent Exhibit 10.16 to Form
Electronics, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.17 MicroAge Purchasing Agreement by and between MicroAge Computer Exhibit 10.17 to Form
Centers, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.18 IBM Business Partner Agreement by and between IBM Exhibit 10.18 to Form
and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.19 Confirmation of Allstar Systems, Inc.'s status as a Compaq authorized Exhibit 10.19 to Form
reseller dated August 6, 1996. S-1 filed Aug. 8, 1996
10.20 Hewlett-Packard U.S. Agreement for Authorized Second Tier Resellers Exhibit 10.20 to Form
by and between Hewlett-Packard Company and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.21 Associate Agreement by and between NEC America, Inc. and Exhibit 10.21 to Form
Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.22 Mitel Elite Dealer Agreement and Extension Addendum by and between Exhibit 10.22 to Form
Mitel, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.23 Dealer Agreement dated March 1, 1995, by and between Applied Voice Exhibit 10.23 to Form
Technology and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.24 Industrial Lease Agreement dated March 9, 1996, by and between Exhibit 10.24 to Form
H-5 J.E.T. Ltd. as lessor and Allstar Systems, Inc. as lessee. S-1 filed Aug. 8, 1996
10.25 Lease Agreement dated June 24, 1992, by and between James J. Laney,
Exhibit 10.25 to Form et al. As lessors, and Technicomp Corporation and
Allstar Services as S-1 filed Aug. 8, 1996 lessees.
10.26 Agreement for Wholesale Financing, Business Financing Agreement Filed herewith
and related agreements and correspondence by and between DFS
Financial Services and Allstar Systems, Inc., dated February 27, 1998
10.27 Sublease Agreement by and between X.O. Spec Corporation and Filed herewith
Allstar Systems, Inc. dated May 12, 1997
21.1 List of Subsidiaries of the Company. Filed herewith
23.1 Independent Auditors' Consent of Deloitte & Touche LLP,. Filed herewith
27.1 Financial Data Schedule. Filed herewith
99.1 Schedule II Valuation and Qualifying Accounts Filed herewith
b No Form 8-K has been filed in the last quarter of the fiscal year covered by
this report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, March 31, 1998.
Allstar Systems, Inc.
(Registrant)
By:/s/ James H. Long
James H Long, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity
/s/ James H. Long Chief Executive Officer, President and Chairman
of the Board
/s/ Donald R. Chadwick Chief Financial Officer, Secretary and Treasurer
and Director
(Principal Financial and Accounting Officer)
/s/ G. Chris Andersen Director
/s/ Richard D. Darrell Director
/s/ Jack M. Johnson Director
/s/ Donald D. Sykora Director
Exhibit 10.26
AGREEMENT FOR WHOLESALE FINANCING
This Agreement for Wholesale Financing ("Agreement") is made as of February 27,
1998 between Deutsche Financial Services Corporation ("DFS") and Allstar
Systems, Inc., a |___| SOLE PROPRIETORSHIP, | | PARTNERSHIP, | X | CORPORATION,
| | LIMITED LIABILITY COMPANY (check applicable term) ("Dealer"), having a
principal place of business located at 6401 Southwest Freeway, Houston, Texas
77074.
1. Extension of Credit. Subject to the terms of this Agreement, DFS may
extend credit to Dealer from time to time to purchase inventory from DFS
approved vendors ("Vendors") and for other purposes. Dealer hereby confirms its
understanding of the discretionary nature of its credit facility established
pursuant hereto. The foregoing notwithstanding, DFS hereby confirms that it has
established a facility available for Dealer's inventory purchases under the
terms of this Agreement in the amount of $20,000,000. If DFS advances funds to
Dealer following Dealer's execution of this Agreement, DFS will be deemed to
have entered into this Agreement with Dealer, whether or not executed by DFS.
DFS' decision to advance funds will not be binding until the funds are actually
advanced. DFS may combine all of DFS' advances to Dealer or on Dealer's behalf,
whether under this Agreement or any other agreement, and whether provided by one
or more of DFS' branch offices, together with all finance charges, fees and
expenses related thereto, to make one debt owed by Dealer. DFS may, at any time
and without notice to Dealer, elect not to finance any inventory sold by
particular Vendors who are in default of their obligations to DFS, or with
respect to which DFS reasonably feels insecure. This is an agreement regarding
the extension of credit, and not the provision of goods or services.
2. Financing Terms and Statements of Transaction. Dealer and DFS agree that
certain financial terms of any advance made by DFS under this Agreement, whether
regarding finance charges, other fees, maturities, curtailments or other
financial terms, are not set forth herein because such terms depend, in part,
upon the availability of Vendor discounts, payment terms or other incentives,
prevailing economic conditions, DFS' floorplanning volume with Dealer and with
Dealer's Vendors, and other economic factors which may vary over time. Dealer
and DFS further agree that it is therefore in their mutual best interest to set
forth in this Agreement only the general terms of Dealer's financing arrangement
with DFS. Upon agreeing to finance a particular item of inventory for Dealer,
DFS will send Dealer a Statement of Transaction identifying such inventory and
the applicable financial terms. Unless Dealer notifies DFS in writing of any
objection within thirty (30) days after a Statement of Transaction is mailed to
Dealer: (a) the amount shown on such Statement of Transaction will be an account
stated; (b) Dealer will have agreed to all rates, charges and other terms shown
on such Statement of Transaction; (c) Dealer will have agreed that DFS is
financing the items of inventory referenced in such Statement of Transaction at
Dealer's request; and (d) such Statement of Transaction will be incorporated
herein by reference, will be made a part hereof as if originally set forth
herein, and will constitute an addendum hereto. If Dealer objects to the terms
of any Statement of Transaction, Dealer agrees to pay DFS for such inventory in
accordance with the most recent terms for similar inventory to which Dealer has
not objected (or, if there are no prior terms, at the lesser of 16% per annum or
at the maximum lawful contract rate of interest permitted under applicable law),
but Dealer acknowledges that DFS may then elect to terminate Dealer's financing
program pursuant to Section 17, and cease making additional advances to Dealer.
However, such termination ---------- will not accelerate the maturities of
advances previously made, unless Dealer shall otherwise be in default of this
Agreement.
3. Grant of Security Interest. To secure payment of all of Dealer's current
and future debts to DFS, whether under this Agreement or any current or future
guaranty or other agreement, Dealer grants DFS a security interest in all of
Dealer's inventory, equipment, fixtures, accounts, contract rights, chattel
paper, security agreements, instruments, deposit accounts, reserves, documents,
and general intangibles; and all judgments, claims, insurance policies, and
payments owed or made to Dealer thereon; all whether now owned or hereafter
acquired, all attachments, accessories, accessions, returns, repossessions,
exchanges, substitutions and replacements thereto, and all proceeds thereof. All
such assets are collectively referred to herein as the "Collateral." All of such
terms for which meanings are provided in the Uniform Commercial Code of the
applicable state are used herein with such meanings. All Collateral financed by
DFS, and all proceeds thereof, will be held in trust by Dealer for DFS, with
such proceeds being payable in accordance with Section 9. ---------
4. Affirmative Warranties and Representations. Dealer warrants and
represents to DFS that: (a) Dealer has good title to all Collateral; (b) DFS'
security interest in the Collateral financed by DFS is not now and will not
become subordinate to the security interest, lien, encumbrance or claim of any
person; (c) Dealer will execute all documents DFS requests to perfect and
maintain DFS' security interest in the Collateral; (d) Dealer will deliver to
DFS immediately upon each request, and DFS may retain, each Certificate of Title
or Statement of Origin issued for Collateral financed by DFS; (e) Dealer will at
all times be duly organized, existing, in good standing, qualified and licensed
to do business in each state, county, or parish, in which the nature of its
business or property so requires; (f) Dealer has the right and is duly
authorized to enter into this Agreement; (g) Dealer's execution of this
Agreement does not constitute a breach of any agreement to which Dealer is now
or hereafter becomes bound; (h) other than as disclosed on Exhibit B, attached
hereto and incorporated herein by this reference, there are and will be no
actions or proceedings pending or threatened against Dealer which might result
in any material adverse change in Dealer's financial or business condition or
which might in any way adversely affect any of Dealer's assets; (i) Dealer will
maintain the Collateral in good condition and repair; (j) Dealer has duly filed
and will duly file all tax returns required by law; (k) Dealer has paid and will
pay when due all taxes, levies, assessments and governmental charges of any
nature; (l) Dealer will keep and maintain all of its books and records
pertaining to the Collateral at its principal place of business designated in
this Agreement; (m) Dealer will promptly supply DFS with such information
concerning it or any guarantor as DFS hereafter may reasonably request; (n) all
Collateral will be kept at Dealer's principal place of business listed above,
and such other locations, if any, of which Dealer has notified DFS in writing or
as listed on any current or future Exhibit "A" attached hereto which written
notice(s) to DFS and Exhibit A(s) are incorporated herein by reference; (o)
Dealer will give DFS thirty (30) days prior written notice of any change in
Dealer's identity, name, form of business organization, ownership, management,
principal place of business, Collateral locations or other business locations,
and before moving any books and records to any other location; (p) Dealer will
observe and perform all matters required by any lease, license, concession or
franchise forming part of the Collateral in order to maintain all the rights of
DFS thereunder; (q) Dealer will advise DFS of the commencement of material legal
proceedings against Dealer or any guarantor; and (r) Dealer will comply with all
applicable laws and will conduct its business in a manner which preserves and
protects the Collateral and the earnings and incomes thereof.
5. Negative Covenants. Dealer will not at any time (without DFS' prior
written consent): (a) other than in the ordinary course of its business, sell,
lease or otherwise dispose of or transfer any of its assets; (b) rent, lease,
demonstrate, consign, or use any Collateral financed by DFS; or (c) merge or
consolidate with another entity.
6. Insurance. Dealer will immediately notify DFS of any material loss,
theft or damage to any Collateral. Dealer will keep the Collateral insured for
its full insurable value under an "all risk" property insurance policy with a
company acceptable to DFS, naming DFS as a lender loss-payee and containing
standard lender's loss payable and termination provisions. Dealer will provide
DFS with written evidence of such property insurance coverage and lender's
loss-payee endorsement.
7. Financial Statements. Dealer will deliver to DFS: (a) within one-hundred
twenty (120) days after the end of each of Dealer's fiscal years, a reasonably
detailed balance sheet as of the last day of such fiscal year and a reasonably
detailed income statement covering Dealer's operations for such fiscal year, in
a form satisfactory to DFS; (b) within forty-five (45) days after the end of
each of Dealer's fiscal quarters, a reasonably detailed balance sheet as of the
last day of such quarter and an income statement covering Dealer's operations
for such quarter, in a form satisfactory to DFS; and (c) within ten (10) days
after request therefor by DFS, any other report reasonably requested by DFS
relating to the Collateral or the financial condition of Dealer. Dealer warrants
and represents to DFS that all financial statements and information relating to
Dealer or any guarantor which have been or may hereafter be delivered by Dealer
or any guarantor are true and correct and have been and will be prepared in
accordance with generally accepted accounting principles consistently applied
and, with respect to such previously delivered statements or information, there
has been no material adverse change in the financial or business condition of
Dealer or any guarantor since the submission to DFS, either as of the date of
delivery, or, if different, the date specified therein, and Dealer acknowledges
DFS' reliance thereon.
8. Reviews. Dealer grants DFS an irrevocable license to enter Dealer's
business locations during normal business hours without notice to Dealer to: (a)
account for and inspect all Collateral; (b) verify Dealer's compliance with this
Agreement; and (c) examine and copy Dealer's books and records related to the
Collateral.
9. Payment Terms. Dealer will immediately pay DFS the principal
indebtedness owed DFS on each item of Collateral financed by DFS (as shown on
the Statement of Transaction identifying such Collateral) on the earliest
occurrence of any of the following events: (a) when such Collateral is lost,
stolen or damaged; (b) for Collateral financed under Pay-As-Sold ("PAS") terms
(as shown on the Statement of Transaction identifying such Collateral), when
such Collateral is sold, transferred, rented, leased, otherwise disposed of or
matured; (c) in strict accordance with any curtailment schedule for such
Collateral (as shown on the Statement of Transaction identifying such
Collateral); (d) for Collateral financed under Scheduled Payment Program ("SPP")
terms (as shown on the Statement of Transaction identifying such Collateral), in
strict accordance with the installment payment schedule; and (e) when otherwise
required under the terms of any financing program agreed to in writing by the
parties. Regardless of the SPP terms pertaining to any Collateral financed by
DFS, if DFS determines that the current outstanding debt which Dealer owes to
DFS exceeds the aggregate wholesale invoice price of such Collateral in Dealer's
possession, Dealer will immediately upon demand pay DFS the difference between
such outstanding debt and the aggregate wholesale invoice price of such
Collateral. If Dealer from time to time is required to make immediate payment to
DFS of any past due obligation discovered during any Collateral review, or at
any other time, Dealer agrees that acceptance of such payment by DFS shall not
be construed to have waived or amended the terms of its financing program. The
proceeds of any Collateral received by Dealer will be held by Dealer in trust
for DFS' benefit, for application as provided in this Agreement. Dealer will
send all payments to DFS' branch office(s) responsible for Dealer's account. DFS
may apply: (i) payments to reduce finance charges first and then principal,
which application may be regardless of Dealer's instructions in the event of a
default; and (ii) principal payments to the oldest (earliest) invoice for
Collateral financed by DFS, but, in any event, all principal payments will first
be applied to such Collateral which is sold, lost, stolen, damaged, rented,
leased, or otherwise disposed of or unaccounted for. Any third party discount,
rebate, bonus or credit granted to Dealer for any Collateral will not reduce the
debt Dealer owes DFS until DFS has received payment therefor in cash. Dealer
will: (1) pay DFS even if any Collateral is defective or fails to conform to any
warranties extended by any third party; (2) not assert against DFS any claim or
defense Dealer has against any third party; and (3) indemnify and hold DFS
harmless against all claims and defenses asserted by any buyer of the Collateral
relating to the condition of, or any representations regarding, any of the
Collateral. Dealer waives all rights of offset and counterclaims Dealer may have
against DFS.
10. Calculation of Charges. Dealer will pay finance charges to DFS on the
outstanding principal debt which Dealer owes DFS for each item of Collateral
financed by DFS at the rate(s) shown on the Statement of Transaction identifying
such Collateral, unless Dealer objects thereto as provided in Section 2. The
_________ finance charges attributable to the rate shown on the Statement of
Transaction will: (a) be computed based on a 360 day year; (b) be calculated by
multiplying the Daily Charge (as defined below) by the actual number of days in
the applicable billing period; and (c) accrue from the invoice date of the
Collateral identified on such Statement of Transaction until DFS receives full
payment in good funds of the principal debt Dealer owes DFS for each item of
such Collateral in accordance with DFS' payment recognition policy and DFS
applies such payment to Dealer's principal debt in accordance with the terms of
this Agreement. The "Daily Charge" is the product of the Daily Rate (as defined
below) multiplied by the Average Daily Balance (as defined below). The "Daily
Rate" is the quotient of the annual rate shown on the Statement of Transaction
divided by 360, or the monthly rate shown on the Statement of Transaction
divided by 30. The "Average Daily Balance" is the quotient of (i) the sum of the
outstanding principal debt owed DFS on each day of a billing period for each
item of Collateral identified on a Statement of Transaction, divided by (ii) the
actual number of days in such billing period. Dealer will also pay DFS $100 for
each check returned unpaid for insufficient funds (an "NSF check") (such $100
payment repays DFS' estimated administrative costs; it does not waive the
default caused by the NSF check). The annual percentage rate of the finance
charges relating to any item of Collateral financed by DFS will be calculated
from the invoice date of such Collateral, regardless of any period during which
any finance charge subsidy shall be paid or payable by any third party. Dealer
acknowledges that DFS intends to strictly conform to the applicable usury laws
governing this Agreement. Regardless of any provision contained herein or in any
other document executed or delivered in connection herewith or therewith, DFS
shall never be deemed to have contracted for, charged or be entitled to receive,
collect or apply as interest on this Agreement (whether termed interest herein
or deemed to be interest by judicial determination or operation of law), any
amount in excess of the maximum amount allowed by applicable law, and, if DFS
ever receives, collects or applies as interest any such excess, such amount
which would be excessive interest will be applied first to the reduction of the
unpaid principal balances of advances under this Agreement, and, second, any
remaining excess will be paid to Dealer. In determining whether or not the
interest paid or payable under any specific contingency exceeds the highest
lawful rate, Dealer and DFS shall, to the maximum extent permitted under
applicable law: (A) characterize any non-principal payment (other than payments
which are expressly designated as interest payments hereunder) as an expense or
fee rather than as interest; (B) exclude voluntary pre-payments and the effect
thereof; and (C) spread the total amount of interest throughout the entire term
of this Agreement so that the interest rate is uniform throughout such term.
11. Billing Statement. DFS will send Dealer a monthly billing statement
identifying all charges due on Dealer's account with DFS. The charges specified
on each billing statement will be: (a) due and payable in full immediately on
receipt; and (b) an account stated, unless DFS receives Dealer's written
objection thereto within 15 days after it is mailed to Dealer. If DFS does not
receive, by the 25th day of any given month, payment of all charges accrued to
Dealer's account with DFS during the immediately preceding month, Dealer will
(to the extent allowed by law) pay DFS a late fee ("Late Fee") equal to the
greater of $5 or 5% of the amount of such finance charges (payment of the Late
Fee does not waive the default caused by the late payment). DFS may adjust the
billing statement at any time to conform to applicable law and this Agreement.
12. Default. Dealer will be in default under this Agreement if:
(I) Any of the following occur and shall continue for ten (10) days
after the sooner to occur of Dealer's receipt of notice of such breach
from DFS or the date on which such breach becomes known to any officer
or other representative of Dealer: (a) Dealer breaches any terms,
warranties or representations contained herein, in any Statement of
Transaction to which Dealer has not objected as provided in Section 2,
or in any other agreement between DFS and Dealer; (b) any guarantor of
Dealer's debts to DFS breaches any terms, warranties or representations
contained in any guaranty or other agreement between the guarantor and
DFS; (c) any representation, statement, report or certificate made or
delivered by Dealer or any guarantor to DFS is not accurate when made;
(d) [INTENTIONALLY OMITTED]; (e) Dealer abandons any material amount of
Collateral; (f) Dealer or any guarantor is or becomes in default in the
payment of any debt owed to any third party; (g) a money judgment issues
against Dealer or any guarantor; (h) an attachment, sale or seizure
issues or is executed against any assets of Dealer or of any guarantor;
(i) [INTENTIONALLY OMITTED]; (j) any guarantor dies; (k) Dealer or any
guarantor shall cease existence as a corporation, partnership, limited
liability company or trust, as applicable; (l) Dealer or any guarantor
ceases or suspends business; (m) Dealer, any guarantor or any member
while Dealer's business is operated as a limited liability company, as
applicable, makes a general assignment for the benefit of creditors; (n)
Dealer, any guarantor or any member while Dealer's business is operated
as a limited liability company, as applicable, becomes insolvent or
voluntarily or involuntarily becomes subject to the Federal Bankruptcy
Code, any state insolvency law or any similar law; (o) any receiver is
appointed for any assets of Dealer, any guarantor or any member while
Dealer's business is operated as a limited liability company, as
applicable; (p) any guaranty of Dealer's debts to DFS is terminated; (q)
Dealer loses any franchise, permission, license or right to sell or deal
in any Collateral which DFS finances; (r) Dealer or any guarantor
misrepresents Dealer's or such guarantor's financial condition or
organizational structure; or
(II) Dealer fails to pay any portion of Dealer's debts to DFS when due
and payable hereunder or under any other agreement between DFS and
Dealer and such failure is not cured within five (5) days after the
applicable due date; provided, however, that during any period of 180
consecutive days commencing at any time hereafter, Dealer shall be
entitled to no more than two (2) such 5-day cure periods, and as to any
such payment failures in excess of such limitation, no such cure period
shall be available to Dealer.
13. Rights of DFS Upon Default. In the event of a default:
(a) DFS may at any time at DFS' election, without notice or demand
to Dealer, do any one or more of the following: declare all or
any part of the debt Dealer owes DFS immediately due and
payable, together with all costs and expenses of DFS'
collection activity, including, without limitation, all
reasonable attorneys' fees; exercise any or all rights under
applicable law (including, without limitation, the right to
possess, transfer and dispose of the Collateral); and/or cease
extending any additional credit to Dealer (DFS' right to cease
extending credit shall not be construed to limit the
discretionary nature of this credit facility).
(b) Dealer will segregate and keep the Collateral in trust for
DFS, and in good order and repair, and will not sell, rent,
lease, consign, otherwise dispose of or use any Collateral,
nor further encumber any Collateral.
(c) Upon DFS' oral or written demand, Dealer will immediately
deliver the Collateral to DFS, in good order and repair, at a
place specified by DFS, together with all related documents;
or DFS may, in DFS' sole discretion and without notice or
demand to Dealer, take immediate possession of the Collateral
together with all related documents.
(d) DFS may, without notice, apply a default finance charge to
Dealer's outstanding principal indebtedness equal to the
default rate specified in Dealer's financing program with DFS,
if any, or if there is none so specified, at the lesser of 3%
per annum above the rate in effect immediately prior to the
default, or the highest lawful contract rate of interest
permitted under applicable law.
All of DFS' rights and remedies are cumulative. DFS' failure
to exercise any of DFS' rights or remedies hereunder will not
waive any of DFS' rights or remedies as to any past, current
or future default.
14. Sale of Collateral. Dealer agrees that if DFS conducts a private sale
of any Collateral by requesting bids from 10 or more dealers or distributors in
that type of Collateral, any sale by DFS of such Collateral in bulk or in
parcels within 120 days of: (a) DFS' taking possession and control of such
Collateral; or (b) when DFS is otherwise authorized to sell such Collateral;
whichever occurs last, to the bidder submitting the highest cash bid therefor,
is a commercially reasonable sale of such Collateral under the Uniform
Commercial Code. Dealer agrees that the purchase of any Collateral by a Vendor,
as provided in any agreement between DFS and the Vendor, is a commercially
reasonable disposition and private sale of such Collateral under the Uniform
Commercial Code, and no request for bids shall be required. Dealer further
agrees that 7 or more days prior written notice will be commercially reasonable
notice of any public or private sale (including any sale to a Vendor). Dealer
irrevocably waives any requirement that DFS retain possession and not dispose of
any Collateral until after an arbitration hearing, arbitration award,
confirmation, trial or final judgment. If DFS disposes of any such Collateral
other than as herein contemplated, the commercial reasonableness of such
disposition will be determined in accordance with the laws of the state
governing this Agreement.
15. Power of Attorney. Dealer grants DFS an irrevocable power of attorney
to: execute or endorse on Dealer's behalf any checks, financing statements,
instruments, Certificates of Title and Statements of Origin pertaining to the
Collateral; supply any omitted information and correct errors in any documents
between DFS and Dealer; upon the occurrence of a default hereunder, initiate and
settle any insurance claim pertaining to the Collateral; and do anything to
preserve and protect the Collateral and DFS' rights and interest therein.
16. Information. DFS may provide to any third party any credit information
on Dealer that DFS may from time to time possess. DFS may obtain from any Vendor
any credit, financial or other information regarding Dealer that such Vendor may
from time to time possess.
17. Termination. Either party may terminate this Agreement at any time by
written notice received by the other party. If DFS terminates this Agreement,
Dealer agrees that if Dealer: (a) is not in default hereunder, 30 days prior
notice of termination is reasonable and sufficient (although this provision
shall not be construed to mean that shorter periods may not, in particular
circumstances, also be reasonable and sufficient); or (b) is in default
hereunder, no prior notice of termination is required. Dealer will not be
relieved from any obligation to DFS arising out of DFS' advances or commitments
made before the effective termination date of this Agreement. DFS will retain
all of its rights, interests and remedies hereunder until Dealer has paid all of
Dealer's debts to DFS. All waivers set forth within this Agreement will survive
any termination of this Agreement.
18. Binding Effect. Dealer cannot assign its interest in this Agreement
without DFS' prior written consent, although DFS may assign or participate DFS'
interest, in whole or in part, without Dealer's consent. This Agreement will
protect and bind DFS' and Dealer's respective heirs, representatives, successors
and assigns.
19. Notices. Except as otherwise stated herein, all notices, arbitration
claims, responses, requests and documents will be sufficiently given or served
if mailed or delivered: (a) to Dealer at Dealer's principal place of business
specified above, Attn: Chief Executive Officer or Chief Financial Officer; and
(b) to DFS at 655 Maryville Centre Drive, St. Louis, Missouri 63141-5832,
Attention: General Counsel, or such other address as the parties may hereafter
specify in writing.
20. NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING
PROMISES TO EXTEND OR RENEW SUCH DEBTS ARE NOT ENFORCEABLE. TO PROTECT DEALER
AND DFS FROM MISUNDERSTANDING OR DISAPPOINTMENT, ALL AGREEMENTS COVERING SUCH
MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE
STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, EXCEPT AS SPECIFICALLY PROVIDED
HEREIN OR AS THE PARTIES MAY LATER AGREE IN WRITING TO MODIFY IT. THERE ARE NO
UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
21. Other Waivers. Dealer irrevocably waives notice of: DFS' acceptance of
this Agreement, presentment, demand, protest, nonpayment, nonperformance, and
dishonor. Dealer and DFS irrevocably waive all rights to claim any punitive
and/or exemplary damages.
22. Severability. If any provision of this Agreement or its application is
invalid or unenforceable, the remainder of this Agreement will not be impaired
or affected and will remain binding and enforceable.
23. Supplement. If Dealer and DFS have heretofore executed other agreements
in connection with all or any part of the Collateral, this Agreement shall
supplement each and every other agreement previously executed by and between
Dealer and DFS, and in that event this Agreement shall neither be deemed a
novation nor a termination of such previously executed agreement nor shall
execution of this Agreement be deemed a satisfaction of any obligation secured
by such previously executed agreement. The foregoing notwithstanding, the
Agreement for Wholesale Financing between Dealer and DFS dated as of March 5,
1997 is hereby terminated and of no further force or effect.
24. Receipt of Agreement. Dealer acknowledges that it has received a true
and complete copy of this Agreement. Dealer acknowledges that it has read and
understood this Agreement. Notwithstanding anything herein to the contrary: (a)
DFS may rely on any facsimile copy, electronic data transmission or electronic
data storage of this Agreement, any Statement of Transaction, billing statement,
invoice from a Vendor, financial statements or other reports, and (b) such
facsimile copy, electronic data transmission or electronic data storage will be
deemed an original, and the best evidence thereof for all purposes, including,
without limitation, under this Agreement or any other agreement between DFS and
Dealer, and for all evidentiary purposes before any arbitrator, court or other
adjudicatory authority.
25. Miscellaneous. Time is of the essence regarding Dealer's performance of
its obligations to DFS notwithstanding any course of dealing or custom on DFS'
part to grant extensions of time. Dealer's liability under this Agreement is
direct and unconditional and will not be affected by the release or
nonperfection of any security interest granted hereunder. DFS will have the
right to refrain from or postpone enforcement of this Agreement or any other
agreements between DFS and Dealer without prejudice and the failure to strictly
enforce these agreements will not be construed as having created a course of
dealing between DFS and Dealer contrary to the specific terms of the agreements
or as having modified, released or waived the same. The express terms of this
Agreement will not be modified by any course of dealing, usage of trade, or
custom of trade which may deviate from the terms hereof. If Dealer fails to pay
any taxes, fees or other obligations which may impair DFS' interest in the
Collateral, or fails to keep the Collateral insured, DFS may, but shall not be
required to, pay such taxes, fees or obligations and pay the cost to insure the
Collateral, and the amounts paid will be: (a) an additional debt owed by Dealer
to DFS, which shall be subject to finance charges as provided herein; and (b)
due and payable immediately in full. Dealer agrees to pay all of DFS' reasonable
attorneys' fees and expenses incurred by DFS in enforcing DFS' rights hereunder.
The Section titles used in this Agreement are for convenience only and do not
define or limit the contents of any Section.
26. BINDING ARBITRATION. 26.1 Arbitrable Claims. Except as otherwise
specified below, all actions, disputes, claims and controversies under common
law, statutory law or in equity of any type or nature whatsoever (including,
without limitation, all torts, whether regarding negligence, breach of fiduciary
duty, restraint of trade, fraud, conversion, duress, interference, wrongful
replevin, wrongful sequestration, fraud in the inducement, usury or any other
tort, all contract actions, whether regarding express or implied terms, such as
implied covenants of good faith, fair dealing, and the commercial reasonableness
of any Collateral disposition, or any other contract claim, all claims of
deceptive trade practices or lender liability, and all claims questioning the
reasonableness or lawfulness of any act), whether arising before or after the
date of this Agreement, and whether directly or indirectly relating to: (a) this
Agreement and/or any amendments and addenda hereto, or the breach, invalidity or
termination hereof; (b) any previous or subsequent agreement between DFS and
Dealer; (c) any act committed by DFS or by any parent company, subsidiary or
affiliated company of DFS (the "DFS Companies"), or by any employee, agent,
officer or director of a DFS Company whether or not arising within the scope and
course of employment or other contractual representation of the DFS Companies
provided that such act arises under a relationship, transaction or dealing
between DFS and Dealer; and/or (d) any other relationship, transaction or
dealing between DFS and Dealer (collectively the "Disputes"), will be subject to
and resolved by binding arbitration. 26.2 Administrative Body. All arbitration
hereunder will be conducted in accordance with the Commercial Arbitration Rules
of The American Arbitration Association ("AAA"). If the AAA is dissolved,
disbanded or becomes subject to any state or federal bankruptcy or insolvency
proceeding, the parties will remain subject to binding arbitration which will be
conducted by a mutually agreeable arbitral forum. The parties agree that all
arbitrator(s) selected will be attorneys with at least five (5) years secured
transactions experience. The arbitrator(s) will decide if any inconsistency
exists between the rules of any applicable arbitral forum and the arbitration
provisions contained herein. If such inconsistency exists, the arbitration
provisions contained herein will control and supersede such rules. The site of
all arbitration proceedings will be in the Division of the Federal Judicial
District in which AAA maintains a regional office that is closest to Dealer.
26.3 Discovery. Discovery permitted in any arbitration proceeding commenced
hereunder is limited as follows. No later than thirty (30) days after the filing
of a claim for arbitration, the parties will exchange detailed statements
setting forth the facts supporting the claim(s) and all defenses to be raised
during the arbitration, and a list of all exhibits and witnesses. No later than
twenty-one (21) days prior to the arbitration hearing, the parties will exchange
a final list of all exhibits and all witnesses, including any designation of any
expert witness(es) together with a summary of their testimony; a copy of all
documents and a detailed description of any property to be introduced at the
hearing. Under no circumstances will the use of interrogatories, requests for
admission, requests for the production of documents or the taking of depositions
be permitted. However, in the event of the designation of any expert
witness(es), the following will occur: (a) all information and documents relied
upon by the expert witness(es) will be delivered to the opposing party, (b) the
opposing party will be permitted to depose the expert witness(es), (c) the
opposing party will be permitted to designate rebuttal expert witness(es), and
(d) the arbitration hearing will be continued to the earliest possible date that
enables the foregoing limited discovery to be accomplished. 26.4 Exemplary or
Punitive Damages. The Arbitrator(s) will not have the authority to award
exemplary or punitive damages. 26.5 Confidentiality of Awards. All arbitration
proceedings, including testimony or evidence at hearings, will be kept
confidential, although any award or order rendered by the arbitrator(s) pursuant
to the terms of this Agreement may be entered as a judgment or order in any
state or federal court and may be confirmed within the federal judicial district
which includes the residence of the party against whom such award or order was
entered. This Agreement concerns transactions involving commerce among the
several states. The Federal Arbitration Act, Title 9 U.S.C. Sections 1 et seq.,
as amended ("FAA") will govern all arbitration(s) and confirmation proceedings
hereunder. 26.6 Prejudgment and Provisional Remedies. Nothing herein will be
construed to prevent DFS' or Dealer's use of bankruptcy, receivership,
injunction, repossession, replevin, claim and delivery, sequestration, seizure,
attachment, foreclosure, dation and/or any other prejudgment or provisional
action or remedy relating to any Collateral for any current or future debt owed
by either party to the other. Any such action or remedy will not waive DFS' or
Dealer's right to compel arbitration of any Dispute. 26.7 Attorneys' Fees. If
either Dealer or DFS brings any other action for judicial relief with respect to
any Dispute (other than those set forth in Section 26.6), the party bringing
such action will be liable for and immediately pay all of the other party's
costs and expenses (including attorneys' fees) incurred to stay or dismiss such
action and remove or refer such Dispute to arbitration. If either Dealer or DFS
brings or appeals an action to vacate or modify an arbitration award and such
party does not prevail, such party will pay all costs and expenses, including
attorneys' fees, incurred by the other party in defending such action.
Additionally, if Dealer sues DFS or institutes any arbitration claim or
counterclaim against DFS in which DFS is the prevailing party, Dealer will pay
all costs and expenses (including attorneys' fees) incurred by DFS in the course
of defending such action or proceeding. 26.8 Limitations. Any arbitration
proceeding must be instituted: (a) with respect to any Dispute for the
collection of any debt owed by either party to the other, within two (2) years
after the date the last payment was received by the instituting party; and (b)
with respect to any other Dispute, within two (2) years after the date the
incident giving rise thereto occurred, whether or not any damage was sustained
or capable of ascertainment or either party knew of such incident. Failure to
institute an arbitration proceeding within such period will constitute an
absolute bar and waiver to the institution of any proceeding, whether
arbitration or a court proceeding, with respect to such Dispute. 26.9 Survival
After Termination. The agreement to arbitrate will survive the termination of
this Agreement.
27. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION. IF THIS AGREEMENT
IS FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL PROCEEDING WITH RESPECT TO
ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE
WITHOUT A JURY. DEALER AND DFS WAIVE ANY RIGHT TO A JURY TRIAL IN ANY SUCH
PROCEEDING.
28. Governing Law. Dealer acknowledges and agrees that this and all other
agreements between Dealer and DFS have been substantially negotiated, and will
be substantially performed, in the state of Illinois. Accordingly, Dealer agrees
that all Disputes will be governed by, and construed in accordance with, the
laws of such state, except to the extent inconsistent with the provisions of the
FAA which shall control and govern all arbitration proceedings hereunder.
IN WITNESS WHEREOF, Dealer and DFS have executed this Agreement as of
the date first set forth hereinabove.
THIS CONTRACT CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGE
WAIVER PROVISIONS.
DEUTSCHE FINANCIAL SERVICES CORPORATION ALLSTAR SYSTEMS, INC.
By:____________________________________ By:__________________________
Print Name:____________________________ Print Name: James H. Long
Title:_________________________________ Title: Chief Executive Officer
ATTEST:
--------------------------------
Secretary
Print Name: Donald R. Chadwick
SECRETARY'S CERTIFICATE OF RESOLUTION
I certify that I am the Secretary or Assistant Secretary of the
corporation named below, and that the following completely and accurately sets
forth certain resolutions of the Board of Directors of the corporation adopted
at a special meeting thereof held on due notice (and with shareholder approval,
if required by law), at which meeting there was present a quorum authorized to
transact the business described below, and that the proceedings of the meeting
were in accordance with the certificate of incorporation, charter and by-laws of
the corporation, and that they have not been revoked, annulled or amended in any
manner whatsoever.
Upon motion duly made and seconded, the following resolution was
unanimously adopted after full discussion:
"RESOLVED, That the several officers, directors, and agents of this
corporation, or any one or more of them, are hereby authorized and empowered on
behalf of this corporation: to obtain financing from Deutsche Financial Services
Corporation ("DFS") in such amounts and on such terms as such officers,
directors or agents deem proper; to enter into financing, security, pledge and
other agreements with DFS relating to the terms upon which such financing may be
obtained and security and/or other credit support is to be furnished by this
corporation therefor; from time to time to supplement or amend any such
agreements; and from time to time to pledge, assign, mortgage, grant security
interests, and otherwise transfer, to DFS as collateral security for any
obligations of this corporation to DFS, whenever and however arising, any assets
of this corporation, whether now owned or hereafter acquired; the Board of
Directors hereby ratifying, approving and confirming all that any of said
officers, directors or agents have done or may do with respect to the
foregoing."
IN WITNESS WHEREOF, I have executed and affixed the seal of the
corporation on the date stated below.
Dated:_February 27_________________, 1998 ____________________________________
Secretary
ALLSTAR SYSTEMS, INC.
(SEAL)
2
BUSINESS FINANCING AGREEMENT
This Business Financing Agreement ("Agreement") is made as of February 27, 1998
between Deutsche Financial Services Corporation ("DFS") and Allstar Systems,
Inc., a | | SOLE PROPRIETORSHIP, | | PARTNERSHIP, | X | CORPORATION, | | LIMITED
LIABILITY COMPANY (check applicable term) ("Dealer"), having a principal place
of business located at 6401 Southwest Freeway, Houston, Texas 77074.
- --------------------------------------------------------------------------------
1. DEFINITIONS
1.1 Special Definitions. The following terms will have the following
meanings in this Agreement, Agreement for Wholesale Financing and
in the Other Agreements:
"Accounts": all accounts, leases, contract rights,
chattel paper, choses in action and instruments,
including any lien or other security interest that
secures or may secure any of the foregoing, plus all
books, invoices, documents and other records in any
form evidencing or relating to any of the foregoing,
now owned or hereafter acquired by Dealer.
"Accounts Receivable Facility": a credit facility
extended pursuant to this Agreement.
"Agreement for Wholesale Financing": any Agreement for
Wholesale Financing, as amended from time to time,
which Dealer has executed in conjunction with inventory
financing extended by DFS.
"Average Contract Balance": the amount determined by
dividing: (a) the sum of the Daily Contract Balances
(as defined in Section 2.1.1) for a billing period; by,
(b) the actual number of days in such billing period.
"Default": the events or occurrences enumerated in
Section 6.
"Entity": any individual, association, firm,
corporation, partnership, limited liability company,
trust, governmental body, agency or instrumentality
whatsoever.
"Guarantor": a guarantor of any of the Obligations.
"Inventory": all of Dealer's presently owned and
hereafter acquired goods which are held for sale or
lease.
"Obligations": all liabilities and indebtedness now or
hereafter arising, owing, due or payable from Dealer to
DFS (and any of its subsidiaries and affiliates),
including any third party claims against Dealer
satisfied or acquired by DFS, whether primary or
secondary, joint or several, direct, contingent, fixed
or otherwise, and whether or not evidenced by
instruments or evidences of indebtedness, and all
covenants, agreements (including consent to binding
arbitration), warranties, duties and representations,
whether such Obligations arise under this Agreement,
the Other Agreements or any other agreements
previously, now or hereafter executed by Dealer and
delivered to DFS or by operation of law.
"Other Agreements": all security agreements (including
the Agreement for Wholesale Financing), mortgages,
leases, instruments, documents, guarantees, schedules,
certificates, contracts and similar agreements
heretofore, now or hereafter executed by Dealer and
delivered to DFS or delivered by or on behalf of Dealer
to a third party and assigned to DFS by operation of
law or otherwise.
"Prime Rate": the rate of interest which Chase
Manhattan Bank publicly announces from time to time as
its prime rate or reference rate; provided, however,
that for purposes of this Agreement, the interest rate
charged to Dealer will at no time be computed on a
Prime Rate of less than seven percent (7%) per annum.
The Prime Rate will change and take effect for purposes
of this Agreement on the day that Chase Manhattan Bank
announces any change in its Prime Rate or reference
rate.
2. CREDIT FACILITY/INTEREST RATES/FEES
2.1 Accounts Receivable Facility. Subject to the terms of this
Agreement, DFS agrees to provide to Dealer an Accounts Receivable
Facility of TEN MILLION DOLLARS ($10,000,000). DFS' decision to
advance funds will not be binding until the funds are actually
advanced.
2.1.1 Interest. Dealer agrees to pay interest to DFS on the
Daily Contract Balance at a rate equal to the Prime
Rate minus one percent (1.0%) per annum. Such interest
will: (i) be computed based on a 360 day year; (ii) be
calculated each day by multiplying the Daily Rate (as
defined below) by the Daily Contract Balance (as
defined below); and (iii) accrue from the date that DFS
makes any Electronic Transfer (as defined in Section
3.10 herein) or otherwise makes an advance under the
Accounts Receivable Facility until DFS receives the
full and final payment of the principal debt which
Dealer owes to DFS, subject to the terms of Section 3.8
herein. The "Daily Rate" is the quotient of the
applicable annual rate provided herein divided by 360.
The "Daily Contract Balance" is the amount of the
outstanding principal debt which Dealer owes to DFS on
the Accounts Receivable Facility at the end of each day
(including the amount of all Electronic Transfers made)
after DFS has credited the payments which it has
received on the Accounts Receivable Facility, subject
to the terms of Section 3.8 herein.
2.1.2 Maximum Interest. Dealer acknowledges that DFS intends
to strictly conform to the applicable usury laws
governing this Agreement. Regardless of any provision
contained herein or in any other document executed or
delivered in connection herewith or therewith,DFS shall
never be deemed to have contracted for, charged or be
entitled to receive, collect or apply as interest on
this Agreement (whether termed interest herein or
deemed to be interest by judicial determination or
operation of law), any amount in excess of the maximu
amount allowed by applicable law, and, if DFS ever
receives, collects or applies as interest any such
excess, such amount which would be excessive interest
will be applied first to the reduction of the unpaid
principal balances of advances under this Agreement,
and, second, any remaining excess will be paid to
Dealer. In determining whether or not the interest paid
or payable under any specific contingency exceeds the
highest lawful rate, Dealer and DFS shall, to the
maximum extent permitted under applicable law: (a)
characterize any non-principal payment (other than
payments which are expressly designated as interest
payments hereunder) as an expense or fee rather than as
interest; (b) exclude voluntary pre-payments and the
effect thereof; and (c) spread the total amount of
interest throughout the entire term of this Agreement
so that the interest rate is uniform throughout such
term.
2.2 Payments. DFS will send Dealer a monthly billing statement(s)
identifying all charges due on Dealer's account with DFS. The
interest and fee charges specified on each billing statement will
be: (a) due and payable in full immediately on receipt, and (b)
an account stated, unless DFS receives Dealer's written objection
thereto within thirty (30) days after it is mailed to Dealer. If
DFS does not receive, by the 25th day of any given month, payment
of all charges accrued to Dealer's account with DFS during the
immediately preceding month, Dealer will (to the extent allowed
by law) pay DFS a late fee ("Late Fee") equal to the greater of
$5 or 5% of the amount of such finance charges (payment of the
Late Fee does not waive the default caused by the late payment).
Dealer will also pay DFS $100 for each of Dealer's checks
returned unpaid for insufficient funds (an "NSF check") (such
$100 payment repays DFS' estimated administrative costs; it does
not waive the default caused by the NSF check). DFS may adjust
the billing statement at any time to conform to applicable law
and this Agreement. Upon the occurrence and during the
continuance of a Default, Dealer waives the right to direct the
application of any payments hereafter received by DFS on account
of the Obligations.
2.3 One Loan. DFS may combine all of DFS' advances to Dealer or on
Dealer's behalf, whether under this Agreement or any Other
Agreements, and whether provided by one or more of DFS' branch
offices, together with all finance charges, fees and expenses
related thereto, to make one debt owed by Dealer.
3. ACCOUNTS RECEIVABLE FACILITY - ADDITIONAL PROVISIONS 3.1 Schedules.
Dealer will, no less than monthly or upon the
occurrence and during the continuance of a Default, weekly, or as
otherwise agreed to, furnish DFS with a schedule of Accounts
("Schedule") which will: (a) describe all Accounts created or
acquired by Dealer since the last Schedule furnished DFS; (b)
inform DFS of any material rejection of goods by any obligor,
material delays in delivery of goods, material non-performance of
contracts and of any assertion of any claim, offset or
counterclaim by any obligor; and (c) inform DFS of any material
adverse information relating to the financial condition of any
obligor.
3.2 Available Credit. On receipt of each Schedule, DFS will credit
Dealer with such amount as DFS may deem advisable up to
eighty-five percent (85%) of the net amount of the eligible
Accounts listed in such Schedule. DFS will loan Dealer such
amounts so credited or a part thereof as requested provided that
at no time will such outstanding loans exceed Dealer's maximum
Accounts Receivable Facility from time to time established by
DFS. No loans need be made by DFS if the Dealer is in Default.
3.3 Ineligible Accounts. DFS will have the sole right to determine
eligibility of Accounts and, without limiting DFS' discretion in
that regard, the following Accounts will be deemed ineligible:
(a) Accounts created from the sale of goods and services on
non-standard terms and/or that allow for payment to be made more
than thirty (30) days from the date of sale; (b) Accounts unpaid
more than ninety (90) days from date of invoice; (c) all Accounts
of any obligor with fifty percent (50%) or more of the
outstanding balance unpaid for more than ninety (90) days from
the date of invoice; (d) Accounts for which the obligor is an
officer, director, shareholder, partner, member, owner, employee,
agent, parent, subsidiary, affiliate of, or is related to Dealer
or has common shareholders, officers, directors, owners, partners
or members; (e) consignment sales; (f) Accounts for which the
payment is or may be conditional; (g) Accounts for which the
obligor is not a commercial or institutional entity or is not a
resident of the United States or Canada; (h) Accounts with
respect to which any warranty or representation provided in
Subsection 3.4 is not true and correct; (i) Accounts which
represent goods or services purchased for a personal, family or
household purpose; (j) Accounts which represent goods used for
demonstration purposes or loaned by the Dealer to another party;
(k) Accounts which are progress payment, barter, or contra
accounts; and (l) any and all other Accounts which DFS deems to
be ineligible, provided that DFS shall use its best efforts to
give Dealer notice of any such determination of ineligibility but
its failure so to do shall in no way limit or impair its rights
hereunder. If DFS determines that any Account is or becomes an
ineligible Account, immediately upon notice thereof from DFS,
Dealer will either pay to DFS an amount equal to the monies
loaned by DFS for such ineligible Account or have its available
credit under the Accounts Receivable Facility reduced
accordingly, as DFS shall determine; provided, further, however,
if after any reduction of Dealer's available credit there exists
any remaining Obligations owing to DFS, Dealer will immediately
pay, in cash to DFS, any such remaining balance.
3.4 Warranties and Representations. For each Account which Dealer
lists on any Schedule, Dealer warrants and represents to DFS that
at all times: (a) such Account is genuine; (b) such Account is
not evidenced by a judgment or promissory note or similar
instrument or agreement; (c) it represents an undisputed bona
fide transaction completed in accordance with the terms of the
invoices and purchase orders relating thereto; (d) to the best of
Dealer's knowledge, the goods sold or services rendered which
resulted in the creation of such Account have been delivered or
rendered to and accepted by the obligor, except for certain of
Dealer's Accounts which are generated from advance billings,
which will in no event in the aggregate exceed at any time 2% of
all of Dealer's Accounts; (e) the amounts shown on the Schedules,
Dealer's books and records and all invoices and statements
delivered to DFS with respect thereto are owing to Dealer and are
not contingent; (f) no payments have been or will be made thereon
except payments made in accordance with the requirements of this
Agreement; (g) there are no offsets, counterclaims or disputes
existing or asserted with respect thereto and Dealer has not made
any agreement with any obligor for any deduction or discount of
the sum payable thereunder except regular discounts allowed by
Dealer in the ordinary course of its business for prompt payment;
(h) to the best of Dealer's knowledge, there are no facts or
events which in any way impair the validity or enforceability
thereof or reduce the amount payable thereunder from the amount
shown on the Schedules, Dealer's books and records and the
invoices and statements delivered to DFS with respect thereto;
(i) to the best of Dealer's knowledge, all persons acting on
behalf of obligors thereon have the authority to bind the
obligor; (j) the goods sold or transferred giving rise thereto
are not subject to any lien, claim, encumbrance or security
interest which is superior to that of DFS; and (k) other than as
disclosed on Exhibit A, attached hereto and incorporated herein
by this reference, there are no proceedings or actions known to
Dealer which are threatened or pending against any obligor
thereon which might result in any material adverse change in such
obligor's financial condition.
3.5 Notes. Loans made pursuant to this Agreement need not be
evidenced by promissory notes unless otherwise required by DFS in
DFS' sole discretion.
3.6 Certain Charges. Dealer will: (a) reimburse DFS for all charges
made by banks, including charges for collection of checks and
other items of payment, and (b) pay DFS' fees for transfers of
funds to or from the Dealer. DFS may, from time to time, announce
its fees for transfers of funds to or from the Dealer, including
the issuance of Electronic Transfers.
3.7 Collections. Unless otherwise directed by DFS, to expedite
collection of Accounts for the benefit of DFS, Dealer shall
notify all of its obligors to make payment of the Accounts to one
or more lock-boxes under the control of DFS, except as permitted
under the terms of the Contingent Blocked Account Amendment to a
Lockbox Agreement, the Lockbox Agreement, and the other documents
pursuant to which such lockboxes and corresponding accounts are
established (as amended, collectively the "Lockbox
Documentation"). The lock-box, and all accounts into which the
proceeds of any such lock-box(es) are deposited, shall be
established at banks selected by the Dealer and satisfactory to
DFS in its sole discretion. Dealer shall issue to any such banks
an irrevocable letter of instruction under the Lockbox
Documentation, in form and substance acceptable to DFS, directing
such banks to deposit all payments or other remittances received
in the lock-box to such account or accounts as DFS shall direct.
All funds deposited in the lock-box or any such account
immediately shall become the property of DFS, and subject to the
terms of the agreements establishing such lock-box(es) and
account(s), any disbursements of the proceeds in the lock-box or
any such account will only be made to DFS except as permitted
under the Lockbox Documentation. Dealer shall obtain the
agreement of such banks to waive any offset rights against the
funds so deposited. DFS assumes no responsibility for such
lock-box arrangement, including, without limitation, any claim of
accord and satisfaction or release with respect to deposits which
any banks accept thereunder. All remittances which Dealer
receives in payment of any Accounts, and the proceeds of any of
the other Collateral, shall be: (i) kept separate and apart from
Dealer's own funds so that they are capable of identification as
DFS' property; (ii) held by Dealer as trustee of an express trust
for DFS' benefit; and (iii) shall be immediately deposited in
such accounts designated by DFS. All proceeds received or
collected by DFS with respect to Accounts, and reserves and other
property of Dealer in possession of DFS at any time or times
hereafter, may be held by DFS without interest to Dealer until
all Obligations are paid in full or applied by DFS on account of
the Obligations. DFS may release to Dealer such portions of such
reserves and proceeds as DFS may determine. Upon the occurrence
and during the continuance of a Default, DFS may notify the
obligors that the Accounts have been assigned to DFS, collect the
Accounts directly in its own name and charge the collection costs
and expenses, including attorneys' fees, to Dealer. DFS has no
duty to protect, insure, collect or realize upon the Accounts to
preserve rights in them.
3.8 Collection Days. All payments and all amounts received on any
Account will be credited by DFS to Dealer's account (subject to
final collection thereof) (i) on the business day of receipt if
in the form of immediately available Electronic Transfer, or (ii)
after allowing one (1) business day for collection of checks or
other instruments or other forms of payment.
3.9 Power of Attorney. Dealer irrevocably appoints DFS (and any
person designated by it) as Dealer's true and lawful Attorney
with full power to at any time, in the discretion of DFS (whether
or not Default has occurred) to: (a) endorse the name of Dealer
upon any of the items of payment or proceeds and deposit the same
in the account of DFS for application to the Obligations; (b)
sign the name of Dealer to verify the accuracy of the Accounts;
and (c) sign the name of Dealer on any document or instrument
that DFS shall deem necessary or appropriate to perfect and
maintain perfected the security interests in the Collateral under
this Agreement and the Other Agreements. In the event of a
Default and after the expiration of any applicable cure period
hereunder, Dealer irrevocably appoints DFS (and any person
designated by it) as Dealer's true and lawful Attorney with full
power to at any time, in the discretion of DFS to: (i) demand
payment, enforce payment and otherwise exercise all of Dealer's
rights, and remedies with respect to the collection of any
Accounts; (ii) settle, adjust, compromise, extend or renew any
Accounts; (iii) settle, adjust or compromise any legal
proceedings brought to collect any Accounts; (iv) sell or assign
any Accounts upon such terms, for such amounts and at such time
or times as DFS may deem advisable; (v) discharge and release any
Accounts; (vi) prepare, file and sign Dealer's name on any Proof
of Claim in Bankruptcy or similar document against any obligor;
(vii) endorse the name of Dealer 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; (viii) take control in any manner of any item
of payments or proceeds and for such purpose to notify the Postal
Authorities to change the address for delivery of mail addressed
to Dealer to such address as DFS may designate; and (ix) initiate
and settle any insurance claim and endorse Dealer's name on any
check, instrument or other item of payment. The power of attorney
is for value and coupled with an interest and is irrevocable so
long as any Obligations remain outstanding and by DFS exercising
such right, DFS shall not waive any right against Dealer until
the Obligations are paid in full.
3.10 Continuing Requirements. Advances hereunder will be made by DFS,
at Dealer's direction, by paper check, electronic transfer by
Automated Clearing House ("ACH"), Fed Wire Funds Transfer ("Fed
Wire") or such other electronic means as DFS may announce from
time to time (ACH, Fed Wire and such other electronic transfer
are collectively referred to as "Electronic Transfers"). If
Dealer does not request advances be made in a specific method of
transfer, DFS may determine from time to time in its sole
discretion what method of transfer to use. Dealer will: (a) if
from time to time required by DFS upon the occurrence and during
the continuance of a Default, immediately upon their creation,
deliver to DFS copies of all invoices, delivery evidences and
other such documents relating to each Account; (b) not permit or
agree to any extension, compromise or settlement or make any
change to any Account, except for those in the ordinary course of
business which do not result in a material adverse change in
Dealer's financial or business condition or which might in any
way materially and adversely affect any of Dealer's assets; (c)
affix appropriate endorsements or assignments upon all such items
of payment and proceeds so that the same may be properly
deposited by DFS pursuant to the Lockbox Documentation; (d)
immediately notify DFS in writing which Accounts may be deemed
ineligible as defined in Subsection 3.3; (e) mark all chattel
paper and instruments now owned or hereafter acquired by it to
show that the same are subject to DFS' security interest and
immediately thereafter deliver such chattel paper and instruments
to DFS with appropriate endorsements and assignments to DFS; (f)
within fifteen (15) days after the end of each month, provide DFS
with a detailed aging of its Accounts for each month, together,
if requested by DFS, with the names and addresses of all
obligors.
3.11 Release. Dealer releases DFS from all claims and causes of action
which Dealer may now or hereafter have for any loss or damage to
it claimed to be caused by or arising from: (a) any failure of
DFS to protect, enforce or collect, in whole or in part, any
Account; (b) DFS' notification to any obligors thereon of DFS'
security interest in any of the Accounts; (c) DFS' directing any
obligor to pay any sum owing to Dealer directly to DFS; and (d)
any other act or omission to act on the part of DFS, its
officers, agents or employees, except for willful misconduct or
gross negligence. DFS will have no obligation to preserve rights
to Accounts against prior parties. Dealer waives all rights of
offset and counterclaims Dealer may have against DFS.
3.12 Review. Dealer grants DFS an irrevocable license to enter
Dealer's business locations during normal business hours without
notice to Dealer to: (a) account for and inspect all Collateral;
(b) verify Dealer's compliance with this Agreement; and (c)
review, examine, and make copies of Dealer's books, records,
files and business procedures and practices. Dealer further
agrees to pay DFS a review fee of One Thousand DOLLARS
($1,000.00) for any such review, inspection or examination made
by DFS. DFS agrees that provided Dealer is not in Default, such
reviews shall not exceed three (3) in number in any calendar
year. DFS may, without notice to Dealer and at any time or times
hereafter, verify the validity, amount or any other matter
relating to any Account by mail, telephone, or other means, in
the name of Dealer or DFS.
4. SECURITY - COLLATERAL
4.1 Grant of Security Interest. To secure payment of all of Dealer's
current and future Obligations and to secure Dealer's performance
of all of the provisions under this Agreement and the Other
Agreements, Dealer grants DFS a security interest in all of
Dealer's inventory, equipment, fixtures, accounts, contract
rights, chattel paper, security agreements, instruments, deposit
accounts, reserves, documents, and general intangibles; and all
judgments, claims, insurance policies, and payments owed or made
to Dealer thereon; all whether now owned or hereafter acquired,
all attachments, accessories, accessions, returns, repossessions,
exchanges, substitutions and replacements thereto, and all
proceeds thereof. All such assets are collectively referred to
herein as the "Collateral." All of such terms for which meanings
are provided in the Uniform Commercial Code of the applicable
state are used herein with such meanings. Dealer covenants with
DFS that DFS may realize upon all or part of any Collateral in
any order it desires and any realization by any means upon any
Collateral will not bar realization upon any other collateral.
Dealer's liability under this Agreement is direct and
unconditional and will not be affected by the release or
nonperfection of any security interest granted hereunder. All
Collateral financed by DFS, and all proceeds thereof, will be
held in trust by Dealer for DFS, with such proceeds being payable
in accordance with this Agreement.
5. WARRANTIES AND REPRESENTATIONS
5.1 Affirmative Warranties and Representations. Except as otherwise
specifically provided in the Other Agreements, Dealer warrants
and represents to DFS that: (a) Dealer has good title to all
Collateral; (b) DFS' security interest in the Accounts will at
all times constitute a perfected, first security interest in such
Accounts and will not become subordinate to the security
interest, lien, encumbrance or claim of any Entity; (c) Dealer
will execute all documents DFS requests to perfect and maintain
DFS' security interest in the Collateral and to fully consummate
the transactions contemplated under this Agreement and the Other
Agreements; (d) Dealer will at all times be duly organized,
existing, in good standing, qualified and licensed to do business
in each state, county, or parish, in which the nature of its
business or property so requires; (e) Dealer has the right and is
duly authorized to enter into this Agreement; (f) Dealer's
execution of this Agreement does not constitute a breach of any
agreement to which Dealer is now or hereafter becomes bound; (g)
except as disclosed on Exhibit A, there are no actions or
proceedings pending or threatened against Dealer which might
result in any material adverse change in Dealer's financial or
business condition or which might in any way adversely affect any
of Dealer's assets; (h) Dealer will maintain the Collateral in
good condition and repair; (i) Dealer has duly filed and will
duly file all tax returns required by law; (j) Dealer has paid
and will pay when due all taxes, levies, assessments and
governmental charges of any nature; (k) Dealer will maintain a
system of accounting in accordance with generally accepted
accounting principles and account records which contain such
information in a format as may be requested by DFS; (l) Dealer
will keep and maintain all of its books and records pertaining to
the Accounts at its principal place of business designated in
this Agreement; (m) Dealer will promptly supply DFS with such
information concerning it or any Guarantor as DFS hereafter may
reasonably request; (n) Dealer will give DFS thirty (30) days
prior written notice of any change in Dealer's identity, name,
form of business organization, ownership, management, principal
place of business, Collateral locations or other business
locations; and before moving any books and records to any other
location; (o) Dealer will observe and perform all matters
required by any lease, license, concession or franchise forming
part of the Collateral in order to maintain all the rights of DFS
thereunder; (p) Dealer will advise DFS of the commencement of
material legal proceedings against Dealer or any Guarantor; (q)
Dealer will comply with all applicable laws and will conduct its
business in a manner which preserves and protects the Collateral
and the earnings and incomes thereof; and (r) Dealer will keep
the Collateral insured for its full insurable value under an "all
risk" property insurance policy with a company acceptable to DFS,
naming DFS as a lender loss-payee and containing standard
lender's loss payable and termination provisions. Dealer will
provide DFS with written evidence of such property insurance
coverage and lender's loss-payee endorsement.
5.2 Negative Covenants. Dealer will not at any time (without DFS'
prior written consent): (a) grant to or in favor of any Entity a
security interest in or permit to exist a lien, claim or
encumbrance in the Accounts which is superior to the interest of
DFS; (b) other than in the ordinary course of its business, sell,
lease or otherwise dispose of or transfer any of its assets; (c)
merge or consolidate with another Entity; (d) subject to the
provisions of Section 5.2.1 below, acquire the assets or
ownership interest of any other Entity; (e) subject to the
provisions of Section 5.2.1 below, enter into any transaction not
in the ordinary course of business; (f) guarantee or indemnify or
otherwise become in any way liable with respect to the
obligations of any Entity (other than of Dealer's wholly-owned
subsidiaries, but only to the extent the aggregate amount of such
obligations does not exceed $500,000), except by endorsement of
instruments or items of payment for deposit to the general
account of Dealer or which are transmitted or turned over to DFS
on account of the Obligations; (g) redeem, retire, purchase or
otherwise acquire, directly or indirectly, any of Dealer's
capital stock except in connection with Dealer's employee stock
purchase plan approved by Dealer's Board of Directors in effect
as of the date hereof to the extent the amount so redeemed or
otherwise acquired does not exceed $1,500,000 in the aggregate at
any time; (h) subject to the provisions of Section 5.2.1 below,
make any change in Dealer's capital structure or in any of its
business objectives or operations which might in any way
adversely affect the ability of Dealer to repay the Obligations;
(i) make any distribution of Dealer's assets not in the ordinary
course of business; (j) subject to the provisions of Section
5.2.1 below, incur any debts outside of the ordinary course of
business except renewals or extensions of existing debts and
interest thereon; and (k) make any loans, advances, contributions
or payments of money or in goods to any affiliated entity or to
any officer, director, stockholder, member or partner of Dealer
or of any such entity (except for compensation for personal
services actually rendered) other than those described on Exhibit
B, attached hereto, on which loans Dealer shall not make any
additional advances and which Dealer shall not amend, modify,
restate or replace without the prior written consent of DFS.
5.2.1 The provisions of Subsections 5.2 (d), (e), (h),
and (j) above notwithstanding, Dealer shall only be required to
obtain DFS' prior written consent for any such action described
therein on and after such time as the aggregate amount of all
such transactions described in such Subsections equals $500,000.
5.3 Financial Statements. Dealer will deliver to DFS: (a) within
one-hundred twenty (120) days after the end of each of Dealer's
fiscal years, a reasonably detailed balance sheet as of the last
day of such fiscal year and a reasonably detailed income
statement covering Dealer's operations for such fiscal year, in a
form satisfactory to DFS; (b) within forty-five (45) days after
the end of each of Dealer's fiscal quarters, a reasonably
detailed balance sheet as of the last day of such quarter and an
income statement covering Dealer's operations for such quarter in
a form satisfactory to DFS; (c) within ten (10) days after
request therefor by DFS, any other report reasonably requested by
DFS relating to the Collateral or the financial condition of
Dealer. Dealer warrants and represents to DFS that all financial
statements and information relating to Dealer or any Guarantor
which have been or may hereafter be delivered by Dealer or any
Guarantor to DFS are true and correct and have been and will be
prepared in accordance with generally accepted accounting
principles consistently applied and, with respect to such
previously delivered statements or information, there has been no
material adverse change in the financial or business condition of
Dealer or any Guarantor since the submission to DFS, either as of
the date of delivery, or, if different, the date specified
therein, and Dealer acknowledges DFS' reliance thereon.
6. DEFAULT
6.1 Definition. Dealer will be in default under this Agreement if:
(I) Any of the following occur and shall continue for ten (10)
days after the sooner to occur of Dealer's receipt of notice of
such breach from DFS or the date on which such breach becomes
known to any officer or other representative of Dealer: (a)
Dealer breaches any terms, warranties or representations
contained herein or in any Other Agreements; (b) any Guarantor of
Dealer's debts to DFS breaches any terms, warranties or
representations contained in any guaranty or Other Agreements;
(c) any representation, statement, report, or certificate made or
delivered by Dealer or any Guarantor to DFS is not accurate when
made; (d) [INTENTIONALLY OMITTED]; (e) Dealer abandons any
material amount of Collateral; (f) Dealer or any Guarantor is or
becomes in default in the payment of any debt owed to any third
party; (g) a money judgment issues against Dealer or any
Guarantor; (h) an attachment, sale or seizure issues or is
executed against any assets of Dealer or of any Guarantor; (i)
[INTENTIONALLY OMITTED]; (k) Dealer or any Guarantor shall cease
existence as a corporation, partnership, limited liability
company or trust, as applicable; (l) Dealer or any Guarantor
ceases or suspends business; (m) Dealer, any Guarantor or any
member while Dealer's business is operated as a limited liability
company, as applicable, makes a general assignment for the
benefit of creditors; (n) Dealer, any Guarantor or any member
while Dealer's business is operated as a limited liability
company, as applicable, becomes insolvent or voluntarily or
involuntarily becomes subject to the Federal Bankruptcy Code, any
state insolvency law or any similar law; (o) any receiver is
appointed for any assets of Dealer, any Guarantor or any member
while Dealer's business is operated as a limited liability
company, as applicable; (p) any guaranty of Dealer's debt to DFS
is terminated; (q) Dealer loses any franchise, permission,
license or right to sell or deal in any Collateral which DFS
finances; (r) Dealer or any Guarantor misrepresents Dealer's or
such Guarantor's financial condition or organizational structure;
or
(II) Dealer fails to pay any of the Obligations when due and
payable and such failure is not cured within five (5) days after
the applicable due date; provided, however, that during any
period of 180 consecutive days commencing at any time hereafter,
Dealer shall be entitled to no more than two (2) such 5-day cure
periods, and as to any such payment failures in excess of such
limitation, no such cure period shall be available to Dealer.
6.2 Rights of DFS. In the event of a Default:
(a) DFS may at any time at DFS' election, without notice or
demand to Dealer, do any one or more of the following:
declare all or any of the Obligations immediately due
and payable, together with all costs and expenses of
DFS' collection activity, including, without
limitation, all reasonable attorneys' fees; exercise
any or all rights under applicable law (including,
without limitation, the right to possess, transfer and
dispose of the Collateral); and/or cease extending any
additional credit to Dealer (DFS' right to cease
extending credit shall not be construed to limit the
discretionary nature of this credit facility). (b)
Dealer will segregate and keep the Collateral in trust
for DFS, and in good order and repair, and will not
sell, rent, lease, consign, otherwise dispose of or use
any Collateral, nor further encumber any Collateral.
(c) Upon DFS' oral or written demand, Dealer will
immediately deliver the Collateral to DFS, in good
order and repair, at a place specified by DFS, together
with all related documents; or DFS may, in DFS' sole
discretion and without notice or demand to Dealer, take
immediate possession of the Collateral together with
all related documents. (d) DFS may, without notice,
apply a default finance charge to Dealer's outstanding
principal indebtedness equal to the default rate
specified in Dealer's financing program with DFS, if
any, or if there is none so specified, at the lesser of
3% per annum above the rate in effect immediately prior
to the Default, or the highest lawful contract rate of
interest permitted under applicable law.
(e) DFS may, without notice to Dealer and at any time or
times enforce payment and collect, by legal proceedings
or otherwise, Accounts in the name of Dealer or DFS;
and take control of any cash or non-cash items of
payment or proceeds of Accounts and of any rejected,
returned, repossessed or stopped in transit goods
relating to Accounts. DFS may at its sole election and
without demand enter, with or without process of law,
any premises where Collateral might be and, without
charge or liability to DFS therefor do one or more of
the following: (i) take possession of the Collateral
and use or store it in said premises or remove it to
such other place or places as DFS may deem convenient;
(ii) take possession of all or part of such premises
and the Collateral and place a custodian in the
exclusive control thereof until completion of
enforcement of DFS' security interest in the Collateral
or until DFS' removal of the Collateral and, (iii)
remain on such premises and use the same, together with
Dealer's materials, supplies, books and records, for
the purpose of performing all acts necessary and
incidental to the collection or liquidation of such
Collateral. All of DFS' rights and remedies are
cumulative. DFS' failure to exercise any of DFS' rights
or remedies hereunder will not waive any of DFS' rights
or remedies as to any past, current or future Default.
6.3 Sale of Collateral. Dealer agrees that if DFS conducts a private
sale of any Collateral by requesting bids from 10 or more dealers
or distributors in that type of Collateral, any sale by DFS of
such Collateral in bulk or in parcels within 120 days of: (a)
DFS' taking possession and control of such Collateral; or (b)
when DFS is otherwise authorized to sell such Collateral;
whichever occurs last, to the bidder submitting the highest cash
bid therefor, is a commercially reasonable sale of such
Collateral under the Uniform Commercial Code. Dealer agrees that
the purchase of any Collateral by a vendor, as provided in any
agreement between DFS and the vendor, is a commercially
reasonable disposition and private sale of such Collateral under
the Uniform Commercial Code, and no request for bids shall be
required. Dealer further agrees that 7 or more days prior written
notice will be commercially reasonable notice of any public or
private sale (including any sale to a vendor). Dealer irrevocably
waives any requirement that DFS retain possession and not dispose
of any Collateral until after an arbitration hearing, arbitration
award, confirmation, trial or final judgment. If DFS disposes of
any such Collateral other than as herein contemplated, the
commercial reasonableness of such disposition will be determined
in accordance with the laws of the state governing this
Agreement.
7. MISCELLANEOUS
7.1 Termination. This Agreement will continue in full force and
effect and be non-cancellable by Dealer (except that it may be
terminated by DFS upon thirty (30) days written notice to Dealer
or in the exercise of its rights and remedies upon Default by
Dealer) for a period of three (3) years from the first day of the
first month following the date hereof and for successive one (1)
year periods thereafter, subject to termination as to future
transactions at the end of any such period on at least ninety
(90) days prior written notice by Dealer to DFS. If such notice
of termination is given by Dealer to DFS, such notice will be
ineffective unless Dealer pays to DFS all Obligations on or
before the termination date. Any termination of this Agreement by
Dealer or DFS will have the effect of accelerating the maturity
of all Obligations not then otherwise due. 7.1.1 Termination
Privilege. Despite anything to the contrary in Section 7.1 of
this Agreement, this Agreement may be terminated by Dealer at any
time upon ninety (90) days prior written notice and payment to
DFS of the following sum (in addition to payment of all
Obligations, whether or not by their terms then due) which sum
represents liquidated damages for the loss of the bargain and not
as a penalty, and the same is hereby acknowledged by Dealer: the
product of (a) One Thousand Dollars ($1,000) multiplied by (b)
the number of months remaining in the original or renewal term;
provided, however, that if Dealer is not in Default, Dealer shall
not be obligated to DFS for such fee if the termination occurs in
connection with DFS' decision to increase the interest rate
chargeable under Section 2.1.1 hereof or DFS' decision to
substantially restrict the criteria for eligibility of Accounts.
This sum will also be paid by Dealer if the Agreement is
terminated on account of Dealer's Default.
7.1.2 Effect of Termination. Dealer will not be relieved from
any Obligations to DFS arising out of DFS' advances or
commitments made before the effective termination date
of this Agreement. DFS will retain all of its rights,
interests and remedies hereunder until Dealer has paid
all of Dealer's Obligations to DFS. All waivers set
forth within this Agreement will survive any
termination of this Agreement.
7.2 Collection. Checks and other instruments delivered to DFS on
account of the Obligations will constitute conditional payment
until such items are actually paid to DFS.
7.3 Demand, Etc. Dealer irrevocably waives notice of: DFS' acceptance
of this Agreement, presentment, demand, protest, nonpayment,
nonperformance, and dishonor. Dealer and DFS irrevocably waive
all rights to claim any punitive and/or exemplary damages. Dealer
waives all notices of default and non-payment at maturity of any
or all of the Accounts.
7.4 Reimbursement. Dealer will assume and reimburse DFS upon demand
for all expenses incurred by DFS in connection with the
preparation of this Agreement and the Other Agreements (including
fees and costs of outside counsel) and all filing and recording
fees and taxes payable in connection with the filing or recording
of all documents under this Agreement and the Other Agreements;
provided, however, that such reimbursement by Dealer hereunder
will not exceed the sum of ONE THOUSAND DOLLARS ($1,000.00).
7.5 Additional Obligations. DFS, without waiving or releasing any
Obligation or Default, may perform any Obligations that Dealer
fails or refuses to perform. DFS shall use its best efforts to
give Dealer notice of any such actions but its failure so to do
shall in no way limit or impair its rights hereunder. All sums
paid by DFS on account of the foregoing and any expenses,
including reasonable attorneys' fees, will be a part of the
Obligations, payable on demand and secured by the Collateral.
7.6 NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT
INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBTS ARE NOT
ENFORCEABLE. TO PROTECT DEALER AND DFS FROM MISUNDERSTANDING OR
DISAPPOINTMENT, ALL AGREEMENTS COVERING SUCH MATTERS ARE
CONTAINED IN THIS WRITING AND THE OTHER AGREEMENTS, WHICH IS THE
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE
PARTIES, EXCEPT AS SPECIFICALLY PROVIDED HEREIN OR AS THE PARTIES
MAY LATER AGREE IN WRITING TO MODIFY IT. THERE ARE NO UNWRITTEN
AGREEMENTS BETWEEN THE PARTIES. DFS may, from time to time,
announce in writing to Dealer (which announcement shall be
delivered in accordance with the notice provisions hereof), its
policies and procedures regarding its administration of this
facility, including, without limitation, DFS' fees for the
transfer of funds to or from Dealer, including Electronic
Transfers; any subsequent use by Dealer of this facility ten (10)
days following any such announcement shall constitute Dealer's
acceptance of such revised policies and procedures beginning
after the expiration of such 10-day period. Time is of the
essence regarding Dealer's performance of its obligations to DFS
notwithstanding any course of dealing or custom on DFS' part to
grant extensions of time. DFS will have the right to refrain from
or postpone enforcement of this Agreement or any Other Agreements
between DFS and Dealer without prejudice and the failure to
strictly enforce these agreements will not be construed as having
created a course of dealing between DFS and Dealer contrary to
the specific terms of the agreements or as having modified,
released or waived the same. The express terms of this Agreement
will not be modified by any course of dealing, usage of trade, or
custom of trade which may deviate from the terms hereof.
7.7 Severability. If any provision of this Agreement or the Other
Agreements or the application thereof is held invalid or
unenforceable, the remainder of this Agreement and the Other
Agreements will not be impaired or affected and will remain
binding and enforceable.
7.8 Supplement. If Dealer and DFS have heretofore executed Other
Agreements in connection with all or any part of the Collateral,
this Agreement shall supplement each and every Other Agreement
previously executed by and between Dealer and DFS, and in that
event this Agreement shall neither be deemed a novation nor a
termination of any such previously executed Other Agreement nor
shall execution of this Agreement be deemed a satisfaction of any
obligation secured by such previously executed Other Agreement.
In the event of any conflict between the terms of this Agreement
and any previously executed Business Financing Agreement between
DFS and Dealer, the terms of this Agreement shall control.
7.9 Section Titles. The Section titles used in this Agreement are for
convenience only and do not define or limit the contents of any
Section.
7.10 Binding Effect. Dealer cannot assign its interest in this
Agreement or any Other Agreements without DFS' prior written
consent, although DFS may assign or participate DFS' interest, in
whole or in part, without Dealer's consent. This Agreement and
the Other Agreements will protect and bind DFS' and Dealer's
respective heirs, representatives, successors and assigns.
7.11 Notices. Except as otherwise stated herein, all notices,
arbitration claims, responses, requests and documents will be
sufficiently given or served if mailed or delivered: (a) to
Dealer at Dealer's principal place of business specified above,
Attn: Chief Executive Officer or Chief Financial Officer; and (b)
to DFS at 655 Maryville Centre Drive, St. Louis, Missouri
63141-5832, Attention: General Counsel, or such other address as
the parties may hereafter specify in writing.
7.12 Receipt of Agreement. Dealer acknowledges that it has received a
true and complete copy of this Agreement. Dealer acknowledges
that it has read and understood this Agreement. Notwithstanding
anything herein to the contrary: (a) DFS may rely on any
facsimile copy, electronic data transmission or electronic data
storage of any Schedule, statement, financial statements or other
reports, and (b) such facsimile copy, electronic data
transmission or electronic data storage will be deemed an
original, and the best evidence thereof for all purposes,
including, without limitation, under this Agreement or any Other
Agreements, and for all evidentiary purposes before any
arbitrator, court or other adjudicatory authority.
7.13 Information. DFS may provide to any third party any credit
information on Dealer that DFS may from time to time possess. DFS
may obtain from any third party any credit, financial or other
information regarding Dealer that such third party may from time
to time possess.
8. BINDING ARBITRATION
8.1 Arbitrable Claims. Except as otherwise specified below, all
actions, disputes, claims and controversies under common law,
statutory law or in equity of any type or nature whatsoever
(including, without limitation, all torts, whether regarding
negligence, breach of fiduciary duty, restraint of trade, fraud,
conversion, duress, interference, wrongful replevin, wrongful
sequestration, fraud in the inducement, usury or any other tort,
all contract actions, whether regarding express or implied terms,
such as implied covenants of good faith, fair dealing, and the
commercial reasonableness of any Collateral disposition, or any
other contract claim, all claims of deceptive trade practices or
lender liability, and all claims questioning the reasonableness
or lawfulness of any act), whether arising before or after the
date of this Agreement, and whether directly or indirectly
relating to: (a) this Agreement or any Other Agreements and/or
any amendments and addenda hereto or thereto, or the breach,
invalidity or termination hereof or thereof; (b) any previous or
subsequent agreement between DFS and Dealer; (c) any act
committed by DFS or by any parent company, subsidiary or
affiliated company of DFS (the "DFS Companies"), or by any
employee, agent, officer or director of an DFS Company whether or
not arising within the scope and course of employment or other
contractual representation of the DFS Companies provided that
such act arises under a relationship, transaction or dealing
between DFS and Dealer; and/or (d) any other relationship,
transaction or dealing between DFS and Dealer (collectively the
"Disputes"), will be subject to and resolved by binding
arbitration.
8.2 Administrative Body. All arbitration hereunder will be conducted
in accordance with the Commercial Arbitration Rules of The
American Arbitration Association ("AAA"). If the AAA is
dissolved, disbanded or becomes subject to any state or federal
bankruptcy or insolvency proceeding, the parties will remain
subject to binding arbitration which will be conducted by a
mutually agreeable arbitral forum. The parties agree that all
arbitrator(s) selected will be attorneys with at least five (5)
years secured transactions experience. The arbitrator(s) will
decide if any inconsistency exists between the rules of any
applicable arbitral forum and the arbitration provisions
contained herein. If such inconsistency exists, the arbitration
provisions contained herein will control and supersede such
rules. The site of all arbitration proceedings will be in the
Division of the Federal Judicial District in which AAA maintains
a regional office that is closest to Dealer.
8.3 Discovery. Discovery permitted in any arbitration proceeding
commenced hereunder is limited as follows. No later than thirty
(30) days after the filing of a claim for arbitration, the
parties will exchange detailed statements setting forth the facts
supporting the claim(s) and all defenses to be raised during the
arbitration, and a list of all exhibits and witnesses. No later
than twenty-one (21) days prior to the arbitration hearing, the
parties will exchange a final list of all exhibits and all
witnesses, including any designation of any expert witness(es)
together with a summary of their testimony; a copy of all
documents and a detailed description of any property to be
introduced at the hearing. Under no circumstances will the use of
interrogatories, requests for admission, requests for the
production of documents or the taking of depositions be
permitted. However, in the event of the designation of any expert
witness(es), the following will occur: (a) all information and
documents relied upon by the expert witness(es) will be delivered
to the opposing party, (b) the opposing party will be permitted
to depose the expert witness(es), (c) the opposing party will be
permitted to designate rebuttal expert witness(es), and (d) the
arbitration hearing will be continued to the earliest possible
date that enables the foregoing limited discovery to be
accomplished.
8.4 Exemplary or Punitive Damages. The Arbitrator(s) will not have
the authority to award exemplary or punitive damages.
8.5 Confidentiality of Awards. All arbitration proceedings, including
testimony or evidence at hearings, will be kept confidential,
although any award or order rendered by the arbitrator(s)
pursuant to the terms of this Agreement may be entered as a
judgment or order in any state or federal court and may be
confirmed within the federal judicial district which includes the
residence of the party against whom such award or order was
entered. This Agreement concerns transactions involving commerce
among the several states. The Federal Arbitration Act, Title 9
U.S.C. Sections 1 et seq., as amended ("FAA") will govern all
arbitration(s) and confirmation proceedings hereunder.
8.6 Prejudgment and Provisional Remedies. Nothing herein will be
construed to prevent DFS' or Dealer's use of bankruptcy,
receivership, injunction, repossession, replevin, claim and
delivery, sequestration, seizure, attachment, foreclosure, dation
and/or any other prejudgment or provisional action or remedy
relating to any Collateral for any current or future debt owed by
either party to the other. Any such action or remedy will not
waive DFS' or Dealer's right to compel arbitration of any
Dispute.
8.7 Attorneys' Fees. If either Dealer or DFS brings any other action
for judicial relief with respect to any Dispute (other than those
set forth in Section 8.6), the party bringing such action will be
liable for and immediately pay all of the other party's costs and
expenses (including attorneys' fees) incurred to stay or dismiss
such action and remove or refer such Dispute to arbitration. If
either Dealer or DFS brings or appeals an action to vacate or
modify an arbitration award and such party does not prevail, such
party will pay all costs and expenses, including attorneys' fees,
incurred by the other party in defending such action.
Additionally, if Dealer sues DFS or institutes any arbitration
claim or counterclaim against DFS in which DFS is the prevailing
party, Dealer will pay all costs and expenses (including
attorneys' fees) incurred by DFS in the course of defending such
action or proceeding. 8.8 Limitations. Any arbitration proceeding
must be instituted: (a) with respect to any Dispute for the
collection of any debt owed by either party to the other, within
two (2) years after the date the last payment was received by the
instituting party; and (b) with respect to any other Dispute,
within two (2) years after the date the incident giving rise
thereto occurred, whether or not any damage was sustained or
capable of ascertainment or either party knew of such incident.
Failure to institute an arbitration proceeding within such period
will constitute an absolute bar and waiver to the institution of
any proceeding, whether arbitration or a court proceeding, with
respect to such Dispute.
8.9 Survival After Termination. The agreement to arbitrate will
survive the termination of this Agreement.
9. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION. IF THIS AGREEMENT IS
FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL PROCEEDING WITH
RESPECT TO ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT
JURISDICTION BY A JUDGE WITHOUT A JURY. DEALER AND DFS WAIVE ANY RIGHT
TO A JURY TRIAL IN ANY SUCH PROCEEDING.
10. Governing Law. Dealer acknowledges and agrees that this and all Other
Agreements between Dealer and DFS have been substantially negotiated,
and will be substantially performed, in the state of Illinois.
Accordingly, Dealer agrees that all Disputes will be governed by, and
construed in accordance with, the laws of such state, except to the
extent inconsistent with the provisions of the FAA which shall control
and govern all arbitration proceedings hereunder.
IN WITNESS WHEREOF, Dealer and DFS have executed this Agreement as of
the date first set forth hereinabove.
THIS CONTRACT CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE
DAMAGE WAIVER PROVISIONS.
DEUTSCHE FINANCIAL SERVICES CORPORATION ALLSTAR SYSTEMS, INC.
By:_______________________________ By:_________________________________
Print Name: ________________________ Print Name: James H. Long
Title:______________________________ Title:______________________________
ATTEST:
____________________________________
Secretary
Print Name: Donald R. Chadwick
SECRETARY'S CERTIFICATE OF RESOLUTION
I certify that I am the Secretary or Assistant Secretary of the
corporation named below, and that the following completely and accurately sets
forth certain resolutions of the Board of Directors of the corporation adopted
at a special meeting thereof held on due notice (and with shareholder approval,
if required by law), at which meeting there was present a quorum authorized to
transact the business described below, and that the proceedings of the meeting
were in accordance with the certificate of incorporation, charter and by-laws of
the corporation, and that they have not been revoked, annulled or amended in any
manner whatsoever.
Upon motion duly made and seconded, the following resolution was
unanimously adopted after full discussion:
"RESOLVED, That the several officers, directors, and agents of this
corporation, or any one or more of them, are hereby authorized and empowered on
behalf of this corporation: to obtain financing from Deutsche Financial Services
Corporation ("DFS") in such amounts and on such terms as such officers,
directors or agents deem proper; to enter into financing, security, pledge and
other agreements with DFS relating to the terms upon which such financing may be
obtained and security and/or other credit support is to be furnished by this
corporation therefor; from time to time to supplement or amend any such
agreements; execute and deliver any and all assignments and schedules; and from
time to time to pledge, assign, mortgage, grant security interests, and
otherwise transfer, to DFS as collateral security for any obligations of this
corporation to DFS, whenever and however arising, any assets of this
corporation, whether now owned or hereafter acquired; the Board of Directors
hereby ratifying, approving and confirming all that any of said officers,
directors or agents have done or may do with respect to the foregoing."
I do further certify that the following are the names and specimen
signatures of the officers and agents of said corporation so empowered and
authorized, namely:
President: James H. Long ____________________________
(Print Name) (Signature)
Chief Financial Officer: Donald R. Chadwick ____________________________
(Print Name) (Signature)
Secretary: Donald R. Chadwick ____________________________
(Print Name) (Signature)
Chief Operating Officer: Ronald J. Burger ____________________________
(Print Name) (Signature)
President IT Services: Shabbir K. Ali ____________________________
(Print Name) (Signature)
President Computer Products:
Frank Cano ____________________________
(Print Name) (Signature)
IN WITNESS WHEREOF, I have executed and affixed the seal of the
corporation on the date stated below.
Dated: February 27, 1998 Secretary
ALLSTAR SYSTEMS, INC.
(SEAL) Corporate Name
CONTINGENT BLOCKED ACCOUNT AGREEMENT
Date: February 27,1998
Southwest Bank of Texas
5 Post Oak Park
4400 Post Oak Parkway
Houston, Texas 77027
Gentlemen:
Reference is hereby made to a lockbox agreement dated February 27,1998 between
ourselves, _Allstar Systems, Inc. ("Company"), and you,Southwest Bank of Texas
("Bank") (hereafter referred to as "Lockbox Agreement"). The Lockbox Agreement
is attached hereto as Exhibit A.
Reference is also made to the Business Financing Agreement dated February 27,
1998 and all addenda thereto between Company and Deutsche Financial Services
Corporation ("DFS") (hereafter referred to as "Financing Agreement").
Pursuant to the Lockbox Agreement, Company has directed its customers to send
remittance payments to a post office box ("Lockbox") rented by Bank as follows:
P.O. Box 4346, Dept. 523
Houston, TX 77210-4346
Account # 0133329
After remittances are processed by Bank, they are deposited into account number
("Special Account"), which was established exclusively for this purpose.
Bank is hereby notified that Company has granted, assigned, conveyed and
transferred to DFS, pursuant to the terms of the Financing Agreement as
permitted by applicable law, all rights, title, security interest, and any other
interest Company has or may have in all remittances sent to the Lockbox and
deposited to the Special Account including checks, drafts, notes, money,
acceptances, cash, and any other evidence of indebtedness (collectively,
"Remittances") as proceeds of accounts receivable in which DFS has a perfected
security interest. DFS also has a security interest in the Special Account and
all certificates and instruments, if any, representing or evidencing the Special
Account and all interest, dividends, cash, instruments and any other property
from time to time received, receivable or otherwise distributed in respect of or
in exchange for any of the collateral referred to herein.
This letter ("Letter Agreement") will constitute the agreement between Company,
DFS and Bank with respect to the Lockbox, the Special Account and the
Remittances collected therein.
From and after the date of this Letter Agreement:
a. Notwithstanding any provision of any depository agreement
relating to the Special Account (or any right otherwise arising), Bank
hereby waives any right of set off or any other right which it may have
from time to time to apply any funds in the Lockbox, the Special
Account or any Remittances to the payment of any present or future
indebtedness of the Company to Bank.
b. Copies of all checks (including check stubs), all "backup"
deposited into the Lockbox by Company's customers (including customers'
advices and statements), bank advices and any other correspondence
regarding the Lockbox service, shall continue to be sent to Company
with a copy to DFS at the address designated below.
c. All items originally deposited in and credited to the Special
Account which are returned unpaid, and all rental fees for the Lockbox,
Lockbox charges and all deposit account activity charges and wire
transfer charges arising from the Special Account will be charged to
the Company.
d. Bank will forward a copy of the monthly statement relating to
the Special Account to DFS at the address designated below, or as DFS
may from time to time direct.
e. Prior to Bank's receipt of the "Notification" (as defined
below), Bank shall honor all withdrawal, payment, transfer or other
instructions received from Company which are consistent with the terms
hereof.
DFS may, at any time, in its sole discretion, send Bank via facsimile
transmission (number ) a written notification in such form as attached hereto as
Exhibit B that control over withdrawals from and all other matters regarding the
Special Account has been transferred from Company to DFS ("Notification").
Upon Bank's receipt of such Notification:
1. Company hereby directs and authorizes Bank to cease honoring
any of Company's withdrawal, payment, transfer or other instructions
regarding the Special Account.
2. The Special Account shall be "blocked" in favor of DFS so that
the only disbursements to be made against the Special Account shall be
in favor of DFS.
3. Company shall have no right to interfere with the processing of
Remittances as set forth in the Lockbox Agreement without the prior
written consent of DFS.
4. Bank agrees not to pay or deliver any amounts from the Lockbox
to the Company or to any payee other than DFS unless so directed by DFS
in writing or unless Bank is otherwise ordered by a court of competent
jurisdiction.
5. Company and Bank agree that, by maintaining the Lockbox and any
Remittances included therein, Bank shall be acting solely as agent on
behalf of DFS.
6. All Lockbox processing instructions presently set forth in the
Lockbox Agreement will continue in effect with the following changes or
additions:
(a) Each banking day collected funds in the Special Account
will be wire transferred to DFS as directed by DFS. (b) Bank
will send checks which state they are for "payment in full" or
contain an equivalent statement to DFS at the address
designated below, or as DFS may from time to time direct, with
a copy to the Company.
Company agrees to indemnify and hold Bank harmless against all liability, loss,
damage or expense, including attorneys' fees, to which Bank may be put or which
Bank may incur by reason of Bank acting upon instructions furnished by Company
and/or DFS.
Company understands and agrees that neither it nor any of its officers, agents
or employees shall assert any claim against DFS or DFS' attorneys for loss,
mutilation, destruction or disappearance of any instrument or document of any
kind, including, but not limited to, currency, checks, money orders, stubs,
correspondence or any other record of property which might be claimed by
Company.
In the event of any conflict between this Letter Agreement and the Lockbox
Agreement, this Letter Agreement shall prevail.
This Letter Agreement may be terminated by DFS or the Bank upon thirty (30) days
prior written notice to all other parties. Notwithstanding any such termination,
the provisions of this Letter Agreement shall remain in full force and effect as
to all transactions which shall have occurred prior to the effective date of
termination.
Company may not terminate, modify or alter this Letter Agreement or the Lockbox
Agreement without the prior written consent of Bank and DFS.
Very truly yours,
Allstar Systems, Inc.
By:
Print Name: Donald R. Chadwick
Title: Chief Financial Officer
All of the foregoing is approved and accepted by the undersigned:
DEUTSCHE FINANCIAL SERVICES CORPORATION Southwest Bank of Texas
(Bank's Name)
By:____________________________ By:______________________________
Name:__________________________ Name: ___________________________
Title:_________________________ Title: __________________________
Date: _________________________ Date:____________________________
Address:_______________________
Attn:__________________________
EXHIBIT B
Date:_______________________
NOTIFICATION
Facsimile Number:
Gentlemen:
Reference is made to a Letter Agreement dated , and executed by and among
____________________________ ("Company"), Deutsche Financial Services
Corporation ("DFS") and _______________________________ ("Bank"). All terms not
defined herein shall have the definitions stated in the Letter Agreement.
DFS hereby notifies Bank that pursuant to the terms set forth in the Letter
Agreement, control of the Special Account shall, as of the date of this notice,
be transferred from Company to DFS, and the Special Account shall from the date
of this notice be held in favor and for the benefit of DFS. The Bank shall take
all further instructions as to the disbursement of funds in the Special Account
from DFS, and, in accordance with the Letter Agreement, until further notice
from DFS, you are directed to wire transfer on each banking day all collected
funds in the Special Account to DFS at
.
Very truly yours,
DEUTSCHE FINANCIAL SERVICES CORPORATION
By:_____________________________
Name:___________________________
Title:__________________________
ADDENDUM TO AGREEMENT FOR WHOLESALE FINANCING
AND BUSINESS FINANCING AGREEMENT
This Addendum is made to (i) that certain Agreement for Wholesale
Financing executed on the 27th day of February, 1998, between Allstar Systems,
Inc. ("Dealer") and Deutsche Financial Services Corporation ("DFS"), as amended
("AWF) and (ii) that certain Business Financing Agreement between Dealer and DFS
dated February 27, 1998, as amended ("BFA").
FOR VALUE RECEIVED, DFS and Dealer agree that the following paragraph is
incorporated into the AWF and BFA as if fully and originally set forth therein:
"Dealer will at all times maintain:
(a) a Tangible Net Worth and Subordinated Debt in the combined amount
of not less than Ten Million Dollars ($10,000,000.00);
(b) a ratio of Debt minus Subordinated Debt to Tangible Net Worth and
Subordinated Debt of not more than Four to One (4.0:1.0); and
(c) a ratio of Current Tangible Assets to current liabilities of not
less than One and Four Tenths to One (1.4:1.0).
For purposes of this paragraph: (i) 'Tangible Net Worth' means the book
value of Dealer's assets less liabilities, excluding from such assets
all Intangibles; (ii) 'Intangibles' means and includes general
intangibles (as that term is defined in the Uniform Commercial Code);
accounts receivable and advances due from officers, directors,
employees, stockholders and affiliates; leasehold improvements net of
depreciation; licenses; good will; prepaid expenses; escrow deposits;
covenants not to compete; the excess of cost over book value of
acquired assets; franchise fees; organizational costs; finance reserves
held for recourse obligations; capitalized research and development
costs; and such other similar items as DFS may from time to time
determine in DFS' sole discretion; (iii) 'Debt' means all of Dealer's
liabilities and indebtedness for borrowed money of any kind and nature
whatsoever, whether direct or indirect, absolute or contingent, and
including obligations under capitalized leases, guaranties or with
respect to which Dealer has pledged assets to secure performance,
whether or not direct recourse liability has been assumed by Dealer;
(iv) 'Subordinated Debt' means all of Dealer's Debt which is
subordinated to the payment of Dealer's liabilities to DFS by an
agreement in form and substance satisfactory to DFS; and (v) 'Current
Tangible Assets' means Dealer's current assets less, to the extent
otherwise included therein, all Intangibles. The foregoing terms will
be determined in accordance with generally accepted accounting
principles consistently applied, and, if applicable, on a consolidated
basis."
Dealer waives notice of DFS' acceptance of this addendum.
All other terms and provisions of the AWF and BFA, to the extent not
inconsistent with the foregoing, are ratified and remain unchanged and in full
force and effect.
IN WITNESS WHEREOF, Dealer and DFS have executed this Addendum on this
27th day of February, 1998.
Allstar Systems, Inc.
ATTEST:_______________________ ________________________________
By:
Title:
Secretary
DEUTSCHE FINANCIAL SERVICES
CORPORATION
________________________________
By:
Title:
LETTER OF DIRECTION
March , 1998
Deutsche Financial Services Corporation
4747 W Lincoln Highway Suite 200
Matteson, IL 60443
Re: Letter of Direction
Gentlemen:
We hereby authorize and direct Deutsche Financial Services Corporation ("DFS")
to pay to IBM Credit Corporation ("Lender") the sum of $_______________________,
which shall be an additional amount of the outstanding indebtedness owed to DFS
under our Business Financing Agreement with DFS (the "Agreement"). The above
amount represents the total sum now outstanding under our financing
relationships with Lender that Lender has advanced to us against our accounts
receivable.
We further affirm that by DFS' payment made hereunder, DFS will obtain a first
and priority security interest in all of the applicable collateral described in
the Agreement or any other agreement between us, and that we will pay DFS
therefor under the terms and conditions of the Agreement and any other written
agreement between us. We realize that we may not set off any credits that we may
now have or have in the future from Lender against any or all of the amount we
owe DFS.
Sincerely,
Allstar Systems, Inc.
By:
Print Name: Donald R. Chadwick
Title: Chief Financial Officer
February 27, 1998
Southwest Bank of Texas
5 Post Oak Park
4400 Post Oak Parkway
Houston, Texas 77027
Gentlemen:
This letter will serve as your authorization to operate Lockbox No. 4346, Dept
523 ("Lockbox") under which remittance checks from our customers will be
presented and collected for the benefit of Deutsche Financial Services
Corporation, with an office located at 3075 Highland Parkway, Suite 600, Downers
Grove, IL 60515 ("DFS"). We have therefore requested our customers to forward
their remittances to our company addressed to Lockbox No. P.O. Box 4346, Dept.
523 , Houston, Texas 77210-4346 , beginning on February 27, 1998.
In the event of any conflict between this letter and the terms of that certain
Contingent Blocked Account Agreement of even date herewith among DFS, the
undersigned and you, the terms and provisions of such Contingent Blocked Account
Agreement shall prevail.
The receivables in the form of remittances that will be sent to the Lockbox have
been assigned to DFS. We have rented this Lockbox in our name and your
representatives are hereby deputied as our agents to have unrestricted and
exclusive access to such Lockbox for the purpose of collecting the mail therein
and processing the remittance for the benefit of DFS.
You are further authorized to open a special checking account No. 133329
("Account") in which you will deposit all checks from the Lockbox which are
accepted hereunder for collection. The Account is to be designated as the
"Special Collection Account of Allstar Systems, Inc." The Account is to be
"blocked" in favor of DFS so that the only disbursements to be made against the
Account will be in favor of DFS.
It is our understanding that you will:
l. Have your employees collect such mail as our agents at times which
coincide with the mail schedules from the areas being serviced.
2. Endorse any checks and any other evidences of payments which are
contained in such mail and appear to be for deposit to our credit when
received at your bank in our name for DFS' benefit.
3. Date any undated checks as of the date received.
4. Maintain a record of the checks received, so that duplicate photographs
can be made, should the need arise.
5. Provide a daily remittance package to us consisting of the following:
a. Validated deposit slip.
b. Adding machine tape detailing the deposits.
c. Photocopy of each check.
d. Papers or documents which accompany payment.
e. Envelopes which contain only correspondence.
f. Checks which are not deposited for any of the reasons listed
below.
6. Mail to us all checks on which the numeric amounts differ and on which
the correct amount cannot be determined from the accompanying documents
and mail a copy of such checks to DFS at its above specified office.
7. Not endorse checks which do not bear the drawer's signature and do not
indicate the drawer's identity, unless the drawer is identified by the
face of the check, in which case, you shall process the check by
affixing a stamped impression requesting the drawee bank to contact the
drawer for authority to pay.
8. Forward a copy of the monthly statements relating to the Lockbox and
Account to DFS at the above-specified address or as DFS may from time to
time direct.
It is also understood that you are acting in connection with the Lockbox and the
Account solely as trustee of an express trust for the benefit of DFS so that you
have no interest in any remittances sent to, or any funds contained within, the
Lockbox and the Account, all of which interest is and shall be DFS'. In
connection therewith, and notwithstanding any provision of any depository
agreement relating to any funds within the Lockbox and the Account, or any other
right otherwise arising, you have waived any right which you have or may have
from time to time to apply any funds or remittances in the Lockbox and the
Account to the payment of any present or future indebtedness of us to you.
Any returned items or service charges relating to the Lockbox and the Account
are to be charged to our regular checking account No. 133213.
From time to time remittance checks or vouchers may carry a printed phrase to
the effect that such checks represent "Payment in Full" (or words of similar
import). We understand that you will inspect all such remittance checks, that
you will send to us for disposition any such checks which bear such a phrase,
but we agree that you shall have no liability in the event that you should
process any check bearing such phraseology.
Please confirm your agreement to the terms and conditions set forth above by
executing and returning the copy of this letter provided. In that regard, you
understand that such copy will be delivered to DFS for its acknowledgment of the
terms and conditions of this letter and that the agreement with you, as set
forth in the preceding paragraphs, may not be revoked or amended without their
written consent.
Very truly yours,
By:
Title: Chief Financial Officer
Letter to Bank (cont.)
(Date)
Page 3
ACKNOWLEDGEMENT
The undersigned hereby acknowledges receipt of the above letter, and hereby
accepts the terms and provisions thereof and agrees to be bound thereby and
subject thereto, on this day of , 19 .
ATTEST: (Name of Bank)
By:_______________________________
Title:______________________________
ACKNOWLEDGEMENT
The undersigned hereby acknowledges receipt of the above letter, and hereby
accepts the terms and provisions thereof and agrees to be bound thereby and
subject thereto, on this day of , 19 .
ATTEST: DEUTSCHE FINANCIAL SERVICES CORPORATION
By:__________________________________
Title:_________________________________
PAYDOWN ADDENDUM TO BUSINESS FINANCING AGREEMENT AND
AGREEMENT FOR WHOLESALE FINANCING
This Addendum is made to (i) that certain Business Financing Agreement
executed on the 27th day of February, 1998, between Allstar Systems, Inc.
("Dealer") and Deutsche Financial Services Corporation ("DFS"), as amended
("BFA") and (ii) that certain Agreement for Wholesale Financing between Dealer
and DFS dated February 27, 1998, as amended ("AWF").
FOR VALUE RECEIVED, DFS and Dealer agree that Section 3.2 of the BFA is
hereby amended to read as follows, and, to the extent applicable, the following
provision shall also amend the AWF (capitalized terms shall have the same
meaning as defined in the BFA unless otherwise indicated):
"3.2 Available Credit; Paydown. On receipt of each Schedule, DFS will
credit Dealer with such amount as DFS may deem advisable up to the
remainder of eighty-five percent (85%) of the net amount of eligible
Accounts listed in such Schedule, minus the amount of Dealer's SPP
Deficit (as defined below) under Dealer's Agreement for Wholesale
Financing (the 'AWF') with DFS as in effect from time to time (the
'Available Credit').
Dealer's 'SPP Deficit' shall mean the amount, if any, by which Dealer's
total current outstanding indebtedness to DFS under the AWF as of the
date of the Inventory Report (as defined below) exceeds the Inventory
Value (as defined below) as determined by, and as of the date of, the
Inventory Report. Such SPP Deficit, if any, will remain in effect for
purposes of this Agreement until the preparation and delivery by Dealer
to DFS of a new Inventory Report. Dealer will forward to DFS by the
15th day of every month, or more frequently at Dealer's and/or DFS'
option, an Inventory Report dated as of the last day of the prior month
which specifies the total aggregate wholesale invoice price of all of
Dealer's inventory financed by DFS under the AWF that is unsold and in
Dealer's possession and control as of the date of the Inventory Report.
The term Inventory Value is defined herein to mean one hundred percent
(100%) of the total aggregate wholesale invoice price of all of
Dealer's inventory financed by DFS under the AWF that is unsold and in
Dealer's possession and control as of the date of the Inventory Report,
excluding therefrom any inventory which DFS determines has
significantly depreciated in value or is otherwise ineligible for
inclusion in such calculation, and to the extent that DFS has a first
priority, fully perfected security interest therein.
In addition, if Dealer's outstanding loans under Dealer's accounts
receivable credit facility as set forth in Section 2.1 of this
Agreement at any time exceed Dealer's Available Credit, Dealer will
immediately pay to DFS an amount not less than the difference between
(i) Dealer's outstanding loans under Dealer's accounts receivable
credit facility as set forth in Section 2.1 of this Agreement, and (ii)
Dealer's Available Credit.
Furthermore, as an amendment to the AWF, in the event Dealer's SPP
Deficit exceeds at any time (a) eighty-five percent (85%) of the net
amount of Dealer's eligible Accounts, minus (b) Dealer's outstanding
loans under Dealer's accounts receivable credit facility as set forth
in Section 2.1 of this Agreement, Dealer will immediately pay to DFS,
as a reduction of Dealer's total current outstanding indebtedness to
DFS under the AWF, the difference between (i) Dealer's SPP Deficit, and
(ii) (a) eighty-five percent (85%) of the net amount of Dealer's
eligible Accounts minus (b) Dealer's outstanding loans under Dealer's
accounts receivable credit facility as set forth in Section 2.1 of this
Agreement. DFS will loan Dealer, on request, such amount so credited or
a part thereof as requested provided that at no time will such
outstanding loans exceed Dealer's maximum accounts receivable credit
facility as set forth in Section 2.1 of this Agreement. No advances or
loans need be made by DFS if Dealer is in Default."
All other terms and provision of the BFA and AWF, to the extent
consistent with the foregoing, are hereby ratified and will remain unchanged and
in full force and effect.
IN WITNESS WHEREOF, Dealer and DFS have both read this Paydown Addendum
to the Business Financing Agreement and Agreement for Wholesale Financing,
understand all the terms and provisions hereof and agree to be bound thereby and
subject thereto as of this 27th day of February, 1998.
ALLSTAR SYSTEMS, INC.
Attest:
By:________________________________
Title:_____________________________
Secretary
DEUTSCHE FINANCIAL SERVICES
CORPORATION
By:________________________________
Title:_____________________________
February 27, 1998
Allstar Systems, Inc.
6401 Southwest Freeway
Houston, TX 77074
Re: Financing Agreements
Gentlemen:
Deutsche Financial Services Corporation ("DFS") and Allstar Systems, Inc.
("Dealer") are parties to that certain Business Financing Agreement dated as of
February 27, 1998 and that certain Agreement for Wholesale Financing dated as of
February 27, 1998 (as amended from time to time, collectively the "Agreements").
Capitalized terms used but not defined herein shall have the meanings given them
in the Business Financing Agreement.
The Agreements are hereby amended to provide that notwithstanding anything
therein to the contrary, Dealer shall maintain a ratio of its average quarterly
outstanding indebtedness to DFS under the AWF (determined in accordance with the
provisions of the next paragraph hereof), to its Average Contract Balance for
any such quarter, of no less than to Two to One (2.0:1.0). In the event Dealer
is not in compliance with such ratio, DFS shall have the right to request
Dealer's agreement to a new, higher interest rate for application to any
advances under the Accounts Receivable Facility.
Dealer's average quarterly outstanding indebtedness to DFS under the AWF for
purposes hereof shall be equal to the arithmetic average of Dealer's outstanding
indebtedness to DFS under the AWF on last day of each month within such quarter.
Except as amended hereby, the terms and conditions of the Agreements are hereby
ratified and shall remain in full force and effect.
Please indicate your acceptance and agreement to the terms and provisions hereof
by signing where indicated below.
DEUTSCHE FINANCIAL SERVICES CORPORATION
By: ______________________________
Name:_____________________________
Title:____________________________
Accepted and agreed to:
ALLSTAR SYSTEMS, INC.
By: ______________________________
Name:_____________________________
Title:____________________________
Date:_____________________________
Exhibit 10.27
LEASE AGREEMENT
Between
STONELAKE ASSOCIATES, LTD.,
as Landlord,
and
PHONEWORKS, INC., DBA ONEPHONE CALL,
as Tenant,
Covering approximately 2,700 gross square feet
of the Building known (or to be known) as
STONELAKE 3
located at
4030 BRAKER LANE WEST, SUITE 310
AUSTIN, Texas 78758
STANDARD INDUSTRIAL LEASE AGREEMENT
TRAMMELL CROW COMPANY - (AUS/91)
Approximately 2,700 gross square feet
4030 Braker Lane West, Suite 310
Austin, Texas 78758
(Stonelake 3)
LEASE AGREEMENT
THIS LEASE AGREEMENT is made and entered into by and between Stonelake
Associates, Ltd., hereinafter referred to as "Landlord," and Phoneworks, Inc.
d/b/a OnePhone Call, hereinafter referred to as "Tenant."
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A. [portion missing]
as used herein shall not include loading docks. Tenant shall immediately give
Landlord written notice of defect or need for repairs, after which Landlord
shall have reasonable opportunity to effect such repairs or cure such defect.
A. Tenant's Share of Common Area Charges. Tenant agrees to pay
its Proportionate Share of he cost of (i) maintenance and/or landscaping
(including both maintenance and replacement of landscaping) of any property that
is a part of the Building and/or the Project; (ii) operating, maintaining and
repairing any property, facilities or services (including without limitation
utilities and insurance therefor) provided for the use or benefit of Tenant or
the common use or benefit of Tenant and other lessees of the Project or the
Building; and (iii) an administrative fee of fifteen percent (15) of all common
area maintenance charges.
I. TENANT'S REPAIRS.
A. Maintenance of Premises and Appurtenances. Tenant, at its own
cost and expense, shall (i) maintain all parts of the Premises and promptly make
all necessary repairs and replacements to the Premises (except those for which
Landlord is expressly responsible hereunder), and (ii) keep the parking areas,
driveways and alleys surrounding the Premises in a clean and sanitary condition.
Tenant's obligation to maintain, repair and make replacements to the Premises
shall cover, but not be limited to, pest control (including termites), trash
removal and the maintenance, repair and replacement of all HVAC, electrical,
plumbing, sprinkler and other mechanical systems.
A. Parking. Tenant and its employees, customers, and licensees
shall have the right to use only its Proportionate Share of any parking areas
that have been designated for such use by Landlord in writing, subject to (i)
all rules and regulations promulgated by Landlord and (ii) rights of ingress and
egress of other lessees. Landlord shall not be responsible for enforcing
Tenant's parking rights against any third parties, and Tenant expressly does not
have the right to tow or obstruct improperly parked vehicles. Tenant agrees not
to park on any public streets or private roadways adjacent to or in the vicinity
of the Premises.
A. System Maintenance. Tenant, at its own cost and expense, shall
enter into a regularly scheduled preventive maintenance/service contract with a
maintenance contractor approved by Landlord for servicing all hot water, heating
and air conditioning systems and equipment within the Premises. The service
contract must include all services suggested by the equipment manufacturer and
its operations/maintenance manual and must become effective within thirty (30)
days of the date Tenant takes possession of the Premises.
A. Option to Maintain Premises. Landlord reserves the right to
perform, in whole or in part and without notice to Tenant, maintenance, repairs
and replacements to the Premises, paving, common area, landscape, exterior
painting, common sewage line plumbing and any other items that are otherwise
Tenant's obligations under this Paragraph 5, in which event, Tenant shall be
liable for its Proportionate Share of the cost and expense of such repair,
replacement, maintenance and other such items.
I. ALTERATIONS. Tenant shall not make any alterations, additions or
improvements to the Premises without the prior written consent of Landlord.
Tenant, at its own costs and expense, may erect such shelves, bins, machinery
and trade fixtures as it desires, provided that (i) such items do not alter the
basic character of the Premises or the Building, (ii) such items do not over
load or damage same, (iii) such items may be removed without injury to the
Premises, and (iv) the construction, erection or installation thereof complies
with all applicable governmental laws, ordinances, regulations and with
Landlord's specifications and requirements. Tenant shall be responsible for
compliance with The Americans With Disabilities Act of 1990. Without implying
any consent of Landlord thereto, all alterations, additions, improvements and
partitions erected by Tenant shall be and remain the property of Tenant during
the term of this Lease. All shelves, bins, machinery and trade fixtures
installed by Tenant shall be removed on or before the earlier to occur of the
day of termination or expiration of this Lease or vacating the Premises, at
which time Tenant shall restore the Premises to their original condition. All
alterations, installations, removals and restorations shall be performed in a
good and workmanlike manner so as not to damage or alter the primary structure
or structural qualities of the Building or other improvements situated on the
Premises or of which the Premises are a part.
I. SIGNS. Any signage Tenant desires for the Premises shall be subject
to Landlord's written approval and shall be submitted to Landlord prior to the
Commencement Date of this Lease. Tenant shall repair, paint and/or replace the
Building fascia surface to which its signs are attached upon Tenant's vacating
the Premises or the removal or alteration of its signage. Tenant shall not,
without Landlord's prior written consent, (i) make any changes to the exterior
of the Premises, such as painting; (ii) install any exterior lights,
decorations, balloons, flags, pennants or banners; or (iii) erect or install any
signs, windows or door lettering, placards, decorations or advertising media of
any type which can be viewed from the exterior of the Premises. All signs,
decorations, advertising media, blinds, draperies and other window treatment or
bars or other security installations visible from outside the Premises shall
conform in all respects to the criteria established by Landlord or shall be
otherwise subject to Landlord's prior written consent.
I. UTILITIES. Landlord agrees to provide normal water and electricity
service to the Premises. Tenant shall pay for all water, gas, heat, light,
power, telephone, sewer, sprinkler charges and other utilities and services used
on or at the Premises, together with any taxes, penalties, surcharges or the
like pertaining to the Tenant's use of the Premises and any maintenance charges
for utilities. Landlord shall have the right to cause any of said services to be
separately metered to Tenant, at Tenant's expense. Tenant shall pay its pro rata
share, as reasonably determined by Landlord, of all charges for jointly metered
utilities. Landlord shall not be liable for any interruption or failure of
utility service on the Premises, and Tenant shall have no rights or claims as a
result of any such failure. In the event water is not separately metered to
Tenant, Tenant agrees that it will not use water and sewer capacity for uses
other than normal domestic restroom and kitchen usage, and Tenant further agrees
to reimburse Landlord for the entire amount of common water and sewer costs as
additional rental if, in fact, Tenant uses water or sewer capacity for uses
other than normal domestic restroom and kitchen uses without first obtaining
Landlord's written permission, including but not limited to the cost for
acquiring additional sewer capacity to service Tenant's excess sewer use.
Furthermore, Tenant agrees in such event to install at its own expense a
submeter to determine Tenant's usage.
I. INSURANCE.
A. Landlord's Insurance. Subject to reimbursement under Paragraph
2C herein, Landlord shall maintain insurance covering the Building in an amount
not less than eighty percent (80%) of the "replacement cost" thereof, insuring
against the perils of fire, lighting, extended coverage, vandalism and malicious
mischief.
A. Tenant's Insurance. Tenant, at its own expense, shall maintain
during the term of this Lease a policy or policies of workers' compensation and
comprehensive general liability insurance, including personal injury and
property damage, with contractual liability endorsement, in the amount of Five
Hundred Thousand Dollars ($500,000.00) for property damage and One Million
Dollars ($1,000,000.00) per occurrence and One Million Dollars ($1,000,000.00)
in the aggregate for personal injuries or deaths of persons occurring in or
about the Premises. Tenant, at its own expense, shall also maintain during the
term of this Lease fire and extended coverage insurance covering the replacement
cost of (i) all alterations, additions, partitions, and improvements installed
or placed on the Premises by Tenant or by Landlord on behalf of Tenant; and (ii)
all of Tenant's personal property contained within the Premises. Said policies
shall (i) name the Landlord as an additional insured and insure Landlord's
contingent liability under or in connection with this Lease (except for the
workers' compensation policy, which instead shall include a waiver of
subrogation endorsement in favor of Landlord); (ii) shall be issued by an
insurance company which is acceptable to Landlord; and (iii) provide that said
insurance shall not be cancelled unless thirty (30) days prior written notice
has been given to landlord. Said policy or policies or certificates thereof
shall be delivered to Landlord by Tenant on or before the Commencement Date and
upon each renewal of said insurance.
A. Prohibited Uses. Tenant will not permit the Premises to be
used for any purpose or in any manner that would (i) void the insurance thereon,
(ii) increase the insurance risk or cost thereof, or (iii) cause the
disallowance of any sprinkler credits; including without limitation, use of the
Premises for the receipt, storage or handling of any product, material or
merchandise that is explosive or highly inflammable. If any increase in the cost
of any insurance on the Premises or the Building is caused by Tenant's use of
the Premises or because Tenant vacates the Premises, then Tenant shall pay the
amount of such increase to Landlord upon demand therefor.
I. FIRE AND CASUALTY DAMAGE.
A. Total or Substantial Damage and Destruction. If the Premises
or the Building should be damaged or destroyed by fire or other peril, Tenant
shall immediately give written notice to Landlord of such damage or destruction.
If the Premises or the Building should be totally destroyed by any peril covered
by the insurance to be provided by Landlord under Paragraph 9A above, or if they
should be so damaged thereby that, in Landlord's estimation, rebuilding or
repairs cannot be completed within one hundred eighty (180) days after the date
of such damage or after such completion there would not be enough time remaining
under the terms of this Lease to fully amortize such rebuilding or repairs, then
this Lease shall terminate and the rent shall be abated during the unexpired
portion of this Lease, effective upon the date of the occurrence of such damage.
A. Partial Damage or Destruction. If the Premises or the Building
should be damaged by any peril covered by the insurance to be provided by
Landlord under paragraph 9A above and, in Landlord's estimation, rebuilding or
repairs can be substantially completed within one hundred eighty (180) days
after the date of such damage, then this Lease shall not terminate and Landlord
shall substantially restore the Premises to its previous condition, except that
Landlord shall not be required to rebuild, repair or replace any part of the
partitions, fixtures, additions and other improvements that may have been
constructed, erected or installed in or about the Premises for the benefit of,
by or for Tenant.
A. Lienholders' Rights in Proceeds. Notwithstanding anything
herein to the contrary, in the event the holder of any indebtedness secured by a
mortgage or deed of trust covering the Premises requires hat the insurance
proceeds be applied to such indebtedness, then Landlord shall have the right to
terminate this Lease by delivering written notice of termination to Tenant
within fifteen (15) days after such requirement is made known to Landlord by any
such holder, whereupon all rights and obligations hereunder shall cease and
terminate.
A. Waiver of Subrogation. Notwithstanding anything in this Lease
to the contrary, Landlord and Tenant hereby waive and release each other of and
from any and all rights of recovery, claims, actions or causes of action against
each other, or their respective agents, officers and employees, for any loss or
damage that may occur to the Premises, improvements to the Building or personal
property (Building contents) within the Building and/or Premises, for any reason
regardless of cause or origin. Each party to this Lease agrees immediately after
execution of this Lease to give written notice of the terms of the mutual
waivers contained in this subparagraph to each insurance company that has issued
to such party policies of fire and extended coverage insurance and to have the
insurance policies properly endorsed to provide that the carriers of such
policies waive all rights of recovery under subrogation or otherwise against the
other party.
I. LIABILITY AND INDEMNIFICATION. Except for any claims, rights of
recovery and causes of action that Landlord has released, Tenant shall hold
Landlord harmless from and defend Landlord against any and all claims or
liability for any injury or damage (i) to any person or property whatsoever
occurring in, on or about the Premises or any part thereof, the Building and/or
other common areas, the use of which Tenant may have in accordance with this
Lease, if (and only if) such injury or damage shall be caused in whole or in
part by the act, neglect, fault or omission of any duty by Tenant, its agents,
servants, employees or invitees; (ii) arising from the conduct or management of
any work done by the Tenant in or about the Premises; (iii) arising from
transactions of the Tenant; and (iv) all costs, counsel fees, expenses and
liabilities incurred in connection with any such claim or action or proceeding
brought thereon. The provisions of this Paragraph 11 shall survive the
expiration or termination of this Lease. Landlord shall not be liable in any
event for personal injury or loss of Tenant's property caused by fire, flood,
water leaks, rain, hail, ice, snow, smoke, lightning, wind, explosion,
interruption of utilities or other occurrences. Landlord strongly recommends
that Tenant secure Tenant's own insurance in excess of the amounts required
elsewhere in this Lease to protect against the above occurrences if Tenant
desires additional coverage for such risks. Tenant shall give prompt notice to
Landlord of any significant accidents involving injury to persons or property.
Furthermore, Landlord shall not be responsible for lost or stolen personal
property, equipment, money or jewelry from the Premises or from the public areas
of the Building or the Project, regardless of whether such loss occurs when the
area is locked against entry. Landlord shall not be liable to Tenant or Tenant's
employees, customers or invitees of any damages or losses to persons or property
caused by any Leases in the Building or the Project, or for any damages or
losses caused by theft, burglary, assault, vandalism, or other crimes. Landlord
strongly recommends that Tenant provide its own security systems and services
and secure Tenant's own insurance in excess of the amounts required elsewhere in
this Lease to protect against the above occurrences if Tenant desires additional
protection or coverage for such risks. Tenant shall give Landlord prompt notice
of any criminal or suspicious conduct within or about the Premises, the Building
or the Project and/or any personal injury or property damage caused thereby.
Landlord may, but is not obligated to, enter into agreements with third parties
for the provision, monitoring, maintenance and repair of any courtesy patrols or
similar services or fire protective systems and equipment and, to the extent
same is provided at Landlord's sole discretion, Landlord shall not be liable to
Tenant for any damages, costs or expenses which occur for any reason in the
event any such system or equipment is not properly installed, monitored or
maintained or any such services are not properly provided. Landlord shall use
reasonable diligence in the maintenance of existing lighting, if any, in the
parking garage or parking areas servicing the Premises, and Landlord shall not
be responsible for additional lighting or any security measures in the Project,
the Premises, the parking garage or other parking areas.
I. USE. The Premises shall be used only for the purpose of receiving,
storing, shipping and selling (other than retail) products, materials and
merchandise made and/or distributed by Tenant and for such other lawful purposes
as may be directly incidental thereto. Outside storage, including without
limitation storage of trucks and other vehicles, is prohibited without
Landlord's prior written consent. Tenant shall comply with all governmental
laws, ordinances and regulations applicable to the use of the Premises and shall
promptly comply with all governmental orders and directives for the correction,
prevention and abatement of nuisances in, upon or connected with the Premises,
all at Tenant's sole expense. Tenant shall not permit any objectionable or
unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the
Premises, nor take any other action that would constitute a nuisance or would
disturb, unreasonably interfere with or endanger Landlord or any other lessees
of the Building or the Project.
I. HAZARDOUS WASTE. The term "Hazardous Substances," as used in this
Lease, shall mean pollutants, contaminants, toxic or hazardous wastes,
radioactive materials or any other substances, the use and/or the removal of
which is required or the use of which is restricted, prohibited or penalized by
any "Environmental Law," which term shall mean any federal, state or local
statute, ordinance, regulation or other law of a governmental or
quasi-governmental authority relating to pollution or protection of the
environment or the regulation of the storage or handling of Hazardous
Substances. Tenant hereby agrees that: (i) no activity will be conducted on the
Premises that will produce any Hazardous Substances, except for such activities
that are part of the ordinary course of Tenant's business activities (the
"Permitted Activities"), provided said Permitted Activities are conducted in
accordance with all Environmental Laws and have been approved in advance in
writing by Landlord and, in connection therewith, Tenant shall be responsible
for obtaining any required permits or authorizations and paying any fees and
providing any testing required by any governmental agency; (ii) the Premises
will not be used in any manner for the storage of any Hazardous Substances,
except for the temporary storage of such materials that are used in the ordinary
course of Tenant's business (the "Permitted Materials"), provided such Permitted
Materials are properly stored in a manner and location meeting all Environmental
Laws and have been approved in advance in writing by Landlord, and, in
connection therewith, Tenant shall be responsible for obtaining any required
permits or authorizations and paying any fees and providing any testing required
by any governmental agency; (iii) no portion of the Premises will be used as a
landfill or a dump; (iv) Tenant will not install any underground tanks of any
type; (v) Tenant will not allow any surface or subsurface conditions to exist or
come into existence that constitute, or with the passage of time may constitute,
a public or private nuisance; and (vi) Tenant will not permit any Hazardous
Substances to be brought onto the Premises, except for the Permitted Materials,
and if so brought or found located thereon, the same shall be immediately
removed, with proper disposal, and all required clean-up procedures shall be
diligently undertaken by Tenant at its sole cost pursuant to all Environmental
Laws. Landlord and Landlord's representatives shall have the right but not the
obligation to enter the Premises for the purpose of inspecting the storage, use
and disposal of any Permitted Materials to ensure compliance with all
Environmental Laws. Should it be determined, in Landlord's sole opinion, that
any Permitted Materials are being improperly stored, used or disposed of, then
Tenant shall immediately take such corrective action as requested by Landlord.
Should Tenant fail to take such corrective action within twenty-four (24) hours,
Landlord shall have the right to perform such work and Tenant shall reimburse
Landlord, on demand, for any and all costs associated with said work. If at any
time during or after the term of this Lease, the Premises is found to be
contaminated with Hazardous Substances, Tenant shall diligently institute proper
and thorough clean-up procedures, at Tenant's sole cost. Tenant agrees to
indemnify and hold Landlord harmless from all claims, demands, actions,
liabilities, costs, expenses, damages, penalties and obligations of any nature
arising from or as a result of any contamination of the Premises with hazardous
Substances, or otherwise arising from the use of the Premises by Tenant. The
foregoing indemnification and the responsibilities of Tenant shall survive the
termination or expiration of this Lease.
I. INSPECTION. Landlord's agents and representatives shall have the
right to enter the Premises at any reasonable time during business hours (or at
any time in case of emergency) (i) to inspect the Premises, (ii) to make such
repairs as may be required or permitted pursuant to this Lease, and/or (iii)
during the last six (6) months of the Lease term, for the purpose of showing the
Premises. In addition, Landlord shall have the right to erect a suitable sign on
the Premises stating the Premises are available for Lease. Tenant shall notify
Landlord in writing at least thirty (30) days prior to vacating the Premises and
shall arrange to meet with Landlord for a joint inspection of the Premises prior
to vacating. If Tenant fails to give such notice or to arrange for such
inspection, then Landlord's inspection of the Premises shall be deemed correct
for the purpose of determining Tenant's responsibility for repairs and
restoration of the Premises.
I. ASSIGNMENT AND SUBLETTING. Tenant shall have the right to sublet,
assign or otherwise transfer or encumber this Lease, or any interest therein,
without the prior written consent of Landlord. Any attempted assignment,
subletting, transfer or encumbrance by Tenant in violation of the terms and
covenants of this paragraph shall be void. Any assignee, sublessee or transferee
of Tenant's interest in this Lease (all such assignees, sublessees and
transferees being hereinafter referred to as "Transferees"), by assuming
Tenant's obligations hereunder, shall assume liability to Landlord for all
amounts paid to persons other than Landlord by such Transferees to which
Landlord is entitled or is otherwise in contravention of this Paragraph 15. No
assignment, subletting or other transfer, whether or not consented to be
Landlord or permitted hereunder, shall relieve Tenant of its liability under
this Lease. If an Event of Default occurs while the Premises or any part thereof
are assigned or sublet, then Landlord, in addition to any other remedies herein
provided or provided by law, may collect directly from such Transferee all rents
payable to the Tenant and apply such rent against any sums due Landlord
hereunder. No such collection shall be construed to constitute a novation or a
release of Tenant from the further performance of Tenant's obligations
hereunder. If Landlord consents to any subletting or assignment by Tenant as
hereinabove provided and any category of rent subsequently received by Tenant
under any such sublease is in excess of the same category of rent payable under
this Lease, or any additional consideration is paid to Tenant by the assignee
under any such assignment, then Landlord may, at its option, declare such excess
rents under any sublease or such additional consideration for any assignment to
be due and payable by Tenant to Landlord as additional rent hereunder. The
following shall additionally constitute an assignment of this Lease by Tenant
for the purposes of this Paragraph 15: (i) if Tenant is a corporation, any
merger, consolidation, dissolution or liquidation, or any change in ownership or
power to vote of thirty percent (30%) or more of Tenant's outstanding voting
stock; (ii) if Tenant is a partnership, joint venture or other entity, any
liquidation, dissolution or transfer of ownership of any interests totaling
thirty percent (30%) or more of the total interests in such entity; (iii) the
sale, transfer, exchange, liquidation or other distribution of more than thirty
percent (30%) of Tenant's assets, other than this Lease; or (iv) the mortgage,
pledge, hypothecation or other encumbrance of or grant of a security interest by
Tenant in this Lease, or of any of Tenant's rights hereunder.
I. CONDEMNATION. If more than eighty percent (80%) of the Premises are
taken for any public or quasi-public use under governmental law, ordinance or
regulation, or by right of eminent domain or private purchase in lieu thereof,
and the taking prevents or materially interferes with the use of the remainder
of the Premises for the purpose for which they were leased to Tenant, then this
Lease shall terminate and the rent shall be abated during the unexpired portion
of this Lease, effective on the date of such taking. If less than eighty percent
(80%) of the Premises are taken for any public or quasi-public use under any
governmental law, ordinance or regulation, or by right of eminent domain or
private purchase in lieu thereof, or if the taking does not prevent or
materially interfere with the use of the remainder of the Premises for the
purpose for which they were leased to Tenant, then this Lease shall not
terminate, but the rent payable hereunder during the unexpired portion of this
Lease shall be reduced to such extent as may be fair and reasonable under all of
the circumstances. All compensation awarded in connection with or as a result of
any of the foregoing proceedings shall be the property of Landlord, and Tenant
hereby assigns any interest in any such award to Landlord; provided, however,
Landlord shall have no interest in any award made to Tenant for loss of business
or goodwill or for the taking of Tenant's trade fixtures and personal property,
if a separate award for such items is made to Tenant.
I. HOLDING OVER. At the termination of this Lease by its expiration or
otherwise, Tenant shall immediately deliver possession of the Premises to
Landlord with all repairs and maintenance required herein to be performed by
Tenant completed. If, for any reason, Tenant retains possession of the Premises
after the expiration or termination of this Lease, unless the parties hereto
otherwise agree in writing, such possession shall be deemed to be a tenancy at
will only, and all of the other terms and provisions of this Lease shall be
applicable during such period, except that Tenant shall pay Landlord from time
to time, upon demand, as rental for the period of such possession, an amount
equal to one and one-half (1 1/2) times the rent in effect on the date of such
termination of this Lease, computed on a daily basis for each day of such
period. No holding over by Tenant, whether with or without consent of Landlord,
shall operate to extend this Lease except as otherwise expressly provided. The
preceding provisions of this Paragraph 17 shall not be construed as consent for
Tenant to retain possession of the Premises in the absence of written consent
thereto by Landlord.
I. QUIET ENJOYMENT. Landlord represents that it has the authority to
enter into this Lease and that, so long as Tenant pays all amounts due hereunder
and performs all other covenants and agreements herein set forth, Tenant shall
peaceably and quietly have, hold and enjoy the Premises for the term hereof
without hindrance or molestation from Landlord, subject to the terms and
provisions of this Lease.
I. EVENTS OF DEFAULT. The following events (herein individually
referred to as an "Event of Default") each shall be deemed as a default in or
breach of Tenant's obligations under this Lease:
A. Tenant shall fail to pay any installment of the rent herein
reserved when due, or any other payment or reimbursement to Landlord required
herein when due, and such failure shall continue for a period of five (5) days
from the date such payment was due.
A. Tenant shall (i) vacate or abandon all or a substantial
portion of the Premises (ii) fail to continuously operate its business at the
Premises for the permitted use set forth herein, in either event whether or not
Tenant is in default of the rental payments due under this Lease.
A. Tenant shall fail to discharge any lien placed upon the
Premises in violation of Paragraph 22 hereof within twenty (20) days after any
such lien or encumbrance is filed against the Premises.
A. Tenant shall default in the performance of any of its
obligations under any other lease to Tenant from Landlord, or from any person or
entity affiliated with or related to Landlord, and same shall remain uncured
after the lapsing of any applicable cure periods provided for under such other
lease.
A. Tenant shall fail to comply with any term, provision or
covenant of this Lease (other than those listed above in this paragraph) and
shall not cure such failure within twenty (20) days after written notice thereof
from Landlord.
I. REMEDIES. Upon each occurrence of an Event of Default, Landlord
shall have the option to pursue any one or more of the following remedies
without any notice or demand:
1. Terminate this Lease;
1. Enter upon and take possession of the Premises without
terminating this Lease;
1. Make such payments and/or take such action and pay and/or
perform whatever Tenant is obligated to pay or perform
under the terms of this Lease, and Tenant agrees that
Landlord shall not be liable for any damages resulting to
Tenant from such action; and/or
1. Alter all locks and other security devices at the
Premises, with or without terminating this Lease, and
pursue, at Landlord's option, one or more remedies
pursuant to this Lease, and Tenant hereby expressly
agrees that Landlord shall not be required to provide to
Tenant the new key to the Premises, regardless of hour,
including Tenant's regular business hours; and in any
such event Tenant shall immediately vacate the Premises,
and if Tenant fails to do so, Landlord without waiving
any other remedy it may have, may enter upon and take
possession of the Premises and expel or remove Tenant and
any other person who may be occupying such Premises or
any part thereof, without being liable for prosecution or
any claim of damages therefore. In the event of any
violation of Section 93.002 of the Texas Property Code by
Landlord or by any agent or employee of Landlord, Tenant
hereby expressly waives any and all rights Tenant may
have under Paragraph (g) of such Section 93.002.
A. Damages Upon Termination. If Landlord terminates this Lease at
Landlord's option, Tenant shall be liable for and shall pay to Landlord the sum
of all rental and other payments owed to Landlord hereunder accrued to the date
of such termination, plus, as liquidated damages, an amount equal to (i) the
present value of the total rental and other payments owed hereunder for the
remaining portion of the Lease term, calculated as if such term expired on the
date set forth in Paragraph 1, less (ii) the present value of the then fair
market rental for the Premises for such period, provided that, because of the
difficulty of ascertaining such value and in order to achieve a reasonable
estimate of liquidated damages hereunder, Landlord and Tenant stipulate and
agree, for the purposes hereof, that such fair market rental shall in no event
exceed seventy-five percent (75%) of the rental amount for such period set forth
in Paragraph 2 above.
A. Damages Upon Repossession. If Landlord repossesses the
Premises without terminating this Lease, Tenant, at Landlord's option, shall be
liable for and shall pay Landlord on demand all rental and other payments owed
to Landlord hereunder, accrued to the date of such repossession, plus all
amounts required to be paid by Tenant to Landlord until the date of expiration
of the term as stated in Paragraph 1, diminished by all amounts actually
received by Landlord through reletting the Premises during such remaining term
(but only to the extent of the rent herein reserved). Actions to collect amounts
due by Tenant to Landlord under this paragraph may be brought from time to time,
on one or more occasions, without the necessity of Landlord's waiting until
expiration of the Lease term.
A. Costs of Reletting, Removing, Repairs and Enforcement. Upon an
Event of Default, in addition to any sum provided to be paid under this
Paragraph 20, Tenant also shall be liable for and shall pay to Landlord (i)
brokers' fees and all other costs and expenses incurred by Landlord in
connection with reletting the whole or any part of the Premises; (ii) the costs
of removing, storing or disposing of Tenant's or any other occupant's property;
(iii) the costs of repairing, altering, remodeling or otherwise putting the
Premises into condition acceptable to a new tenant or tenants' (iv) any and all
costs and expenses incurred by Landlord in effecting compliance with Tenant's
obligations under this Lease; and (v) all reasonable expenses incurred by
Landlord in enforcing or defending Landlord's rights and/or remedies hereunder,
including without limitation all reasonable attorneys' fees and all court costs
incurred in connection with such enforcement or defense. B. Late Charge. In the
event Tenant fails to make any payment due hereunder within five (5) days after
such payment is due, including without limitation any rental or escrow payment,
in order to help defray the additional cost to Landlord for processing such
payments and not as interest, Tenant shall pay to Landlord on demand a late
charge in an amount equal to five percent (5%) of such payment. The provision
for such late charge shall be in addition to all of the Landlord's other rights
and remedies hereunder or at law, and shall not be construed as liquidated
damages or as limiting Landlord's remedies in any manner.
A. Interest on Past Due Amounts. If Tenant fails to pay any sum
which at any time becomes due to Landlord under any provision of this Lease as
and when the same becomes due hereunder, and such failure continues for ten (10)
days after the due date for such payment, then Tenant shall pay to Landlord
interest on such overdue amounts from the date due until paid at an annual rate
which equals the lesser of (i) eighteen percent (18%) or (ii) the highest rate
then permitted by law.
A. No Implied Acceptance or Waivers. Exercise by Landlord of any
one or more remedies hereunder granted or otherwise available shall be deemed to
be an acceptance by Landlord of Tenant's surrender of the Premises, it being
understood that such surrender can be effected only by the written agreement of
Landlord. Tenant and Landlord further agree that forbearance by Landlord to
enforce any of its rights under this Lease or at law or in equity shall not be a
waiver of Landlord's rights to enforce any one or more of its rights, including
any right previously forborne, in connection with any existing or subsequent
default. No re-entry or taking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this Lease, unless a written
notice of such intention is given to Tenant, and, notwithstanding any such
reletting or re-entry or taking possession of the Premises, Landlord may at any
time thereafter elect to terminate this Lease for a previous default. Pursuit of
any remedies hereunder shall not preclude the pursuit of any other remedy herein
provided or any other remedies provided by law, nor shall pursuit of any remedy
herein provided constitute a forfeiture or waiver of any rent due to Landlord
hereunder or of any damages occurring to Landlord by reason of the violation of
any of the terms, provisions and covenants contained in this Lease. Landlord's
acceptance of any rent following an Event of Default hereunder shall not be
construed as Landlord's waiver of such Event of Default. No waiver by Landlord
of any violation or breach of any of the terms, provisions and covenants of this
Lease shall be deemed or construed to constitute a waiver of any other violation
or default.
A. Reletting of Premises. In the event of any termination of this
Lease and/or repossession of the Premises for an Event of Default, Landlord
shall use reasonable efforts to relet the Premises and to collect rental after
reletting, with no obligation to accept any lessee that Landlord deems
undesirable or to expend any funds in connection with such reletting or
collection of rents therefrom. Tenant shall not be entitled to credit for
reimbursement of any proceeds of such reletting in excess of the rental owed
hereunder for the period of such reletting. Landlord may relet the whole or any
portion of the Premises, for any period, to any tenant and for any use or
purpose.
A. Landlord's Default. If Landlord fails to perform any of its
obligations hereunder within thirty (30) days after written notice from Tenant
specifying such failure, Tenant's exclusive remedy shall bean action for
damages. Unless and until Landlord fails to so cure any default after such
notice. Tenant shall not have any remedy or cause of action by reason thereof.
All obligations of Landlord hereunder will be construed as covenants, not
conditions; and all such obligations will be binding upon Landlord only during
the period of its possession of the premises and not thereafter. The term
"Landlord" shall mean only the owner, for the time being, of the Premises and,
in the event of the transfer by such owner of its interest in the Premises, such
owner shall thereupon be released and discharged from all covenants and
obligations of the Landlord thereafter accruing, provided that such covenants
and obligations shall be binding during the Lease term upon each new owner for
the duration of such owner's ownership. Notwithstanding any other provision of
this Lease, Landlord shall not have any personal liability hereunder. In the
event of any breach or default by Landlord in any term or provision of this
Lease, Tenant agrees to look solely to the equity or interest then owned by
Landlord in the Premises or the Building; however, in no event shall any
deficiency judgment or any money judgment of any kind be sought or obtained
against any Landlord.
A. Tenant's Personal Property. If Landlord repossesses the Premises
pursuant to the authority herein granted, or if Tenant vacates or abandons all
or any part of the Premises, then, in addition to Landlord's rights under
paragraph 27 hereof, Landlord shall have the right to (i) keep in place and use,
or (ii) remove and store, all of the furniture, fixtures and equipment at the
Premises, including that which is owned by or leased to Tenant, at all times
prior to any foreclosure thereon by Landlord or repossession thereof by any
lessor thereof or third party having a lien thereon. In addition to the
Landlord's other rights hereunder, Landlord may dispose of the stored property
if Tenant does not claim the property within ten (10) days after the date the
property is stored. Landlord shall give Tenant at least ten (10) days prior
written notice of such intended disposition. Landlord shall also have the right
to relinquish possession of all or any portion of such furniture, fixtures,
equipment and other property to any person ("Claimant") who presents to Landlord
a copy of any instrument represented by Claimant to have been executed by Tenant
(or any predecessor of Tenant) granting Claimant the right under various
circumstances to take possession of such furniture, fixtures, equipment or other
property, without the necessity on the part of Landlord to inquire into the
authenticity or legality of said instrument. The rights of Landlord herein
stated shall be in addition to any and all other rights that Landlord has or may
hereafter have at law or in equity, and Tenant stipulates and agrees that the
rights granted Landlord under this paragraph are commercially reasonable.
I. MORTGAGES. Tenant accepts this Lease subject and subordinate to any
mortgages and/or deeds of trust now or at any time hereafter constituting a lien
or charge upon the Premises or the improvements situated thereon or the
Building, provided, however, that if the mortgagee, trustee or holder of any
such mortgage or deed of trust elects to have Tenant's interest in this Lease
superior to any such instrument, then by notice to Tenant from such mortgagee,
trustee or holder, this Lease shall be deemed superior to such lien, whether
this Lease was executed before or after said mortgage or deed of trust. Tenant,
at any time hereafter on demand, shall execute any instruments, releases or
other documents that may be required by any mortgagee, trustee or holder for the
purpose of subjecting and subordinating this Lease to the lien of any such
mortgage. Tenant shall not terminate this Lease or pursue any other remedy
available to Tenant hereunder for any default on the part of Landlord without
first giving written notice by certified or registered mail, return receipt
requested, to any mortgagee, trustee or holder of any such mortgage or deed of
trust, the name and post office address of which Tenant has received written
notice, specifying the default in reasonable detail and affording such
mortgagee, trustee or holder a reasonable opportunity (but in no event less than
thirty (30) days) to make performance, at its election, for and on behalf of
Landlord.
I. MECHANIC'S LIENS. Tenant has no authority, express or implied, to
create or place any lien or encumbrance of any kind or nature whatsoever upon,
or in any manner to bind, the interest of Landlord or Tenant in the Premises.
Tenant will save and hold Landlord harmless from any and all loss, cost or
expense, including without limitation attorneys' fees, based on or arising out
of asserted claims or liens against the leasehold estate or against the right,
title and interest of the Landlord in the Premises or under the terms of this
Lease.
I. MISCELLANEOUS.
A. Interpretation. The captions inserted in this Lease are for
convenience only and in no way define, limit or otherwise describe the scope or
intent of this Lease, or any provisions hereof, or in any way affect the
interpretation of this Lease. Any reference in this Lease to rentable area shall
mean the gross rentable area as determined by the roofline of the building in
question.
A. Binding Effect. Except as otherwise herein expressly provided,
the terms, provisions and covenants and conditions in this Lease shall apply to,
inure to the benefit of and be binding upon the parties hereto and upon their
respective heirs, executors, personal representatives, legal representatives,
successors and assigns. Landlord shall have the right to transfer and assign, in
whole or in part, its rights and obligations in the Premises and in the Building
and other property that are the subject of this Lease.
A. Evidence of Authority. Tenant agrees to furnish to Landlord,
promptly upon demand, a corporate resolution, proof of due authorization by
partners or other appropriate documentation evidencing the due authorization of
such party to enter into this Lease.
A. Force Majeure. Landlord shall not be held responsible for
delays in the performance of its obligations hereunder when caused by material
shortages, acts of God, labor disputes or other events beyond the control of
Landlord.
A. Payments Constitute Rent. Notwithstanding anything in this
Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord
under this Lease, whether or not expressly denominated as rent, shall constitute
rent.
A. Estoppel Certificates. Tenant agrees, from time to time,
within ten (10) days after the request of Landlord, to deliver to Landlord or
Landlord's designee, an estoppel certificate stating that this Lease is in full
force and effect, the date to which rent has been paid, the unexpired term of
this Lease, any defaults existing under this Lease (or the absence thereof) and
such other factual or legal matters pertaining to this Lease as may be requested
by Landlord. It is understood and agreed that Tenant's obligation to furnish
such estoppel certificates in a timely fashion is a material inducement for
Landlord's execution of this Lease.
A. Entire Agreement. This Lease constitutes the entire
understanding and agreement of Landlord and Tenant with respect to the subject
matter of this Lease, and contains all of the covenants and agreements of
Landlord and Tenant with respect thereto. Landlord and Tenant each acknowledge
that no representations, inducements, promises or agreements, oral or written,
have been made by Landlord or Tenant, or anyone acting on behalf of Landlord or
Tenant, which are not contained herein, and any prior agreements, promises,
negotiations or representations not expressly set forth in this Lease are of no
force or effect. EXCEPT AS SPECIFICALLY PROVIDED IN THIS LEASE, TENANT HEREBY
WAIVES THE BENEFIT OF ALL WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE
PREMISES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY THAT THE PREMISES
ARE SUITABLE FOR ANY PARTICULAR PURPOSE. Landlord's agents and employees do not
and will not have authority to make exceptions, changes or amendments to this
Lease, or factual representations not expressly contained in this Lease. Under
no circumstances shall Landlord or Tenant be considered an agent of the other.
This Lease may not be altered, changed or amended except by an instrument in
writing signed by both parties hereto.
A. Survival of Obligations. All obligations of Tenant
hereunder not fully performed as of the expiration or earlier termination of the
term of this Lease shall survive the expiration or earlier termination of the
term hereof, including without limitation all payment obligations with respect
to taxes and insurance and all obligations concerning the condition and repair
of the Premises. Upon the expiration or earlier termination of the term hereof,
and prior to Tenant vacating the Premises, Tenant shall pay to Landlord any
amount reasonably estimated by Landlord as necessary to put the Premises in good
condition and repair, reasonable wear and tear excluded, including without
limitation, the cost of repairs to and replacements of all heating and air
conditioning systems and equipment therein. Tenant shall also, prior to vacating
the Premises, pay to Landlord the amount, as estimated by Landlord, of Tenant's
obligation hereunder for real estate taxes and insurance premiums for the year
in which the Lease expires or terminates. All such amounts shall be used and
held by Landlord for payment of such obligations of Tenant hereunder, with
Tenant being liable for any additional costs therefore upon demand by Landlord,
or with any excess to be returned to Tenant after all such obligations have been
determined and satisfied, as the case may be. Any Security Deposit held by
Landlord may, at Landlord's option, be credited against any amounts due from
Tenant under this Paragraph 23H.
A. Severability of Terms. If any clause or provision of this
Lease is illegal, invalid or unenforceable under present or future laws
effective during the term of this Lease, then, in such event, it is the
intention of the parties hereto that the remainder of this Lease shall not be
affected thereby, and it is also the intention of the parties to this Lease that
in lieu of each clause or provision of this Lease that is illegal, invalid or
unenforceable, there be added, as part of this Lease, a clause or provision as
similar in terms to such illegal, invalid or unenforceable clause or provision
as may be possible and be legal, valid and enforceable.
A. Effective Date. All references in this Lease to "the date
hereof" or similar references shall be deemed to refer to the last date, in
point of time, on which all parties hereto have executed this Lease.
A. Brokers' Commission. Tenant represents and warrants that it
has dealt with and will deal with no broker, agent or other person in connection
with this transaction or future related transactions and that no broker, agent
or other person brought about this transaction, and Tenant agrees to indemnify
and hold Landlord harmless from and against any claims by any broker, agent or
other person claiming a commission or other form of compensation by virtue of
having dealt with Tenant with regard to this leasing transaction.
A. Ambiguity. Landlord and Tenant hereby agree and acknowledge
that this Lease has been fully reviewed and negotiated by both Landlord and
Tenant, and that Landlord and Tenant have each had the opportunity to have this
Lease reviewed by their respective legal counsel, and, accordingly, in the event
of any ambiguity herein, Tenant does hereby waive the rule of construction that
such ambiguity shall be resolved against the party who prepared this Lease.
A. Joint Several Liability. If there be more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several. If there
be a guarantor of Tenant's obligations hereunder, the obligations hereunder
imposed upon Tenant shall be joint and several obligations of Tenant and such
guarantor, and Landlord need not first proceed against Tenant before proceeding
against such guarantor, nor shall any such guarantor be released from its
guaranty for any reason whatsoever, including, without limitation, in case of
any amendments hereto, waivers hereof or failure to give such guarantor any
notices hereunder.
A. Third Party Rights. Nothing herein expressed or implied is
intended, or shall be construed, to confer upon or give to any person or entity,
other than the parties hereto, any right or remedy under or by reason of this
Lease.
A. Exhibits and Attachments. All exhibits, attachments, riders
and addenda referred to in this Lease, and the exhibits listed herein below and
attached hereto, are incorporated into this Lease and made a part hereof for all
intents and purposes as if fully set out herein. All capitalized terms used in
such documents shall, unless otherwise defined therein, have the same meanings
as are set forth herein.
B. Applicable Law. This Lease has been executed in the State of
Texas and shall be governed in all respects by the laws of the State of Texas.
It is the intent of Landlord and Tenant to conform strictly to all applicable
state and federal usury laws. All agreements between Landlord and Tenant,
whether now existing or hereafter arising and whether written or oral, are
hereby expressly limited so that in no contingency or event whatsoever shall the
amount contracted for, charged or received by Landlord for the use, forbearance
or retention of money hereunder or otherwise exceed the maximum amount which
Landlord is legally entitled to contract for, charge or collect under the
applicable state or federal law. If, from any circumstance whatsoever,
fulfillment of any provision hereof at the time performance of such provision
shall be due shall involve transcending the limit of validity prescribed by law,
then the obligation to be fulfilled shall be automatically reduced to the limit
of such validity, and if from any such circumstance Landlord shall ever receive
as interest or otherwise an amount in excess of the maximum that can be legally
collected, then such amount which would be excessive interest shall be applied
to the reduction of rent hereunder, and if such amount which would be excessive
interest exceeds such rent, then such additional amounts shall be refunded to
Tenant.
I. NOTICES. Each provision of this instrument or if any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivering of notice of the making of any payment by
Landlord to Tenant or with reference to the sending, mailing or delivering of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
(i) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address for Landlord set
forth below or at such other address as Landlord may specify from time to time
by written notice delivered in accordance herewith. Tenant's obligation to pay
rent and any other amounts to Landlord under the terms of this Lease shall not
be deemed satisfied until such rent and other amounts have been actually
received by Landlord.
(ii) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address set forth below, or at such other
address within the continental United States as Tenant may specify from time to
time by written notice delivered in accordance herewith.
(iii) Except as expressly provided herein, any written notice,
document, or payment required or permitted to be delivered hereunder shall be
deemed to be delivered when received or, whether actually received or not, when
deposited in the United States Mail, postage prepaid, Certified or Registered
Mail, addressed to the parties hereto at the respective addresses set out below,
or at such other address as they have theretofore specified by written notice
delivered in accordance herewith.
I. ADDITIONAL PROVISIONS. See Exhibit "C" attached hereto and
incorporated herein by reference. II. LANDLORD'S LIEN. In addition to any
statutory lien for rent in Landlord's favor, Landlord shall have and Tenant
hereby grants to Landlord a continuing security interest in all rentals and
other sums of money which may become due under this Lease from Tenant, all
goods, equipment, fixtures, furniture, inventory, and other personal property of
Tenant now or hereafter situated at, on or within the real property described in
EXHIBIT "A" attached hereto and incorporated herein by reference, and such
property shall not be removed therefrom without the consent of Landlord, except
in the ordinary course of Tenant's business. In the event any of the foregoing
described property is removed from the Premises in violation of the covenant in
the preceding sentence, the security interest shall continue in such property
and all proceeds and products, regardless of location. Upon an Event of Default
hereunder by Tenant, in addition to all of Landlord's other rights and remedies,
Landlord shall have all rights and remedies under the Uniform Commercial Code,
including without limitation the right to sell the property described in this
paragraph at public or private sale at any time after ten (10) days prior notice
by Landlord. Tenant hereby agrees to execute such other instruments deemed by
Landlord as necessary or desirable under applicable law to perfect more fully
the security interest hereby created. Landlord and Tenant agree that this Lease
and security agreement and EXHIBIT "A" attached hereto serves as a financing
statement and that a copy, photograph or other reproduction of this portion of
this Lease may be filed of record by Landlord and have the same force and effect
as the original. This security agreement and financing statement also covers
fixtures located at the Premises subject to this Lease and legally described in
EXHIBIT "A" attached hereto, and all rents or other consideration received by or
on behalf of Tenant in connection with any assignment of Tenant's interest in
this Lease or any sublease of the Premises or any part thereof, and, therefore,
may also be filed for record in the appropriate real estate records.
EXECUTED BY LANDLORD, this _______ of ________________, 19______.
STONELAKE ASSOCIATES, LTD.:
By: Crow-Gottesman-Hill #23, General Partner
By: Trammell Crow Central Texas, Inc., Agent
By: Andrew R. Pastor
Title: Vice President
Attest/Witness Address: c/o Trammell Crow Central Texas, Inc.
301 Congress Avenue, Suite 1300, Austin, Tx 78701
Title:
EXECUTED BY TENANT, this _____ day of ___________, 19_____.
PHONEWORKS, INC., DBA ONEPHONE CALL:
By: Kenneth J. Hardor
Title: President
Attest/Witness Address: 11130 Jollyville Rd. #1000
Austin, Tx 78759
Title:
EXHIBIT "A" - Description of Premises
EXHIBIT "C" - Additional Provisions
EXHIBIT "A"
BUILDING: Stonelake #3
LEGAL DESCRIPTION: James Rogers Survey #19, Abstract 659
ADDRESS: 4030 Braker Lane West
Austin, Texas 78759
[DIAGRAM OF BRAKER LANE]
EXHIBIT "C"
ADDITIONAL PROVISIONS
INTERIOR IMPROVEMENTS
Tenant shall accept the premises in its current "as is" condition and shall be
responsible for all interior improvements. These improvements must comply with
Trammell crow Company's standard specifications (see Standards and
Specifications for Office/Warehouse Buildings) and all applicable governmental
regulations. Prior to beginning construction of any such improvements, Tenant
shall submit architectural drawings of the proposed improvements to Landlord and
shall obtain Landlord's written consent to begin construction.
TENANT FINISH ALLOWANCE
Tenant shall pay all costs of improvements in the demised premises. After
completion of such improvements, Tenant shall provide Landlord with invoices for
all work performed. At the end of the lease term, Landlord shall pay one-half of
cost of such improvements up to a maximum of four thousand fifty and 00/100
Dollars ($4,050.00) plus interest at eight percent (8%), i.e., if the Tenant
finish cost of Tenant prior to occupancy is ten thousand and 00/100 Dollars
($10,000), the Landlord would owe Tenant four thousand five hundred forty five
and 40/100 Dollars ($4,545.40) at the end of the thirtieth month ($4,050 maximum
amortized at 8% interest for 2.5 years).
RENEWAL OPTION
Provided no Event of Default exists, Tenant may renew the Lease for one
additional period of thirty months (30) on the same terms provided in the Lease,
(except as set forth below), by delivering written notice of the exercise
thereof to Landlord not later than one hundred twenty days (120) before the
expiration of the Term.
The Basic Rental payable for each month during each such extended Term shall be
as follows:
30 Month Option
Months Base Rental Rate
1-6 $.75NNN
7-30 $.80NNN
These amounts shall be in addition to property taxes, common area maintenance,
and insurance.
If Tenant exercises this renewal option, at the end of tush renewal option (61st
month of the overall lease term), Landlord shall pay one-half the amount of the
cost of Tenant improvements as delineated in Exhibit C, Tenant Finish Allowance.
This amount shall not be in excess of four thousand and fifty and 00/100 Dollars
($4,050.00) and shall accrue interest at an eight percent (8%) interest rate
commencing at the date such improvements are made, i.e.: If tenant finish cost
prior to initial tenant occupancy (prior to 1st month of occupancy) was nine
thousand and 00/100 Dollars ($9,000.00), the Landlord would owe tenant four
thousand nine hundred eighty four and 32/100 Dollars ($4,984.32) ($4,050.00
maximum at 8% interest rate for 61 months).
EXHIBIT "C"
[DIAGRAM OF DRIVE UP RAMP]
PAGE 1
EXHIBIT "C"
Changes to suite 305:
1. Addition of Eleven (11) five foot (5') dry wall partitions anchored to floor.
2. Move door from inside room to hallway.
3. Remove room in warehouse and replace new wall and door.
X-O-SPEC Corporation
SubLessor
By:
Alan K. Harder, Vice President
TRICOHO, Ltd.
Palm Springs Co., a Texas Corporation, General Partner
Lessor
By:
Sarah Puckett, Vice President
Allstar Systems, Inc.,
SubLessee
By:
Frank Cano, Sr. Vice President, Branch Operations
WAIVER OF LIABILITY
The undersigned acknowledges and agrees that neither the Trammell Crow Company
nor its agent, Trammell Crow Central Texas, Ltd., nor the owner, or their
partners, affiliates, agents, employees, successors or assigns shall be liable
for claims, property damage or loss which may be sustained by the undersigned or
their personal representative or dependents, whether or not caused in whole or
in part by the active or passive actions of The Owner/Owens, Trammell Crow
Company, Trammell crow Central Texas, Ltd., or their partners, affiliates,
agents, employees successors, or assigns or any cause whatsoever. In this
regard, the undersigned hereby agrees to assume all risk of such occurrences and
to hold Trammell Crow Company, Trammell Crow Central Texas, Ltd., The
Owner/Owners, or their partners, affiliates, agents, employees, successors or
assigns harmless and indemnify and defend same against any and all claims,
liabilities, damages, liens and expenses (including, without limitation,
reasonable attorney's fees) arising directly or indirectly from any such
occurrences. Allstar Systems, Inc. will self perform all work in Exhibit "C."
Signature Date
Printed Name
EXHIBIT "A"
BUILDING: Stonelake #3
LEGAL DESCRIPTION: James Rogers Survey #19, Abstract 659
ADDRESS: 4030 Braker Lane West, Suite 305
Austin, Texas 78759
[DIAGRAM OF SUBLEASE SPACE, BRAKER LANE]
EXHIBIT "A"
BUILDING: Stonelake #3
LEGAL DESCRIPTION: James Rogers Survey #19, Abstract 659
ADDRESS: 4030 Braker Lane West, Suites 310 and 320
Austin, Texas 78759
[DIAGRAM OF EXISTING 2,700 S.F. SPACE AND NEW 4,991 S.F. SPACE]
SUBLEASE AGREEMENT
This Sublease is made this __ day of _____________ , 19 at Travis or
Williamson County, Texas by and between X.O. Spec Corporation, (herein,
"Sublessor"), and Allstar Systems, Inc., (herein, "Sublessee").
Sublessor is the Lessee under that certain lease, (the "Main Lease"),
by and between TRICOHO, Ltd. a Texas limited partnership, as Landlord, (herein,
"Lessor"), and X.O. Spec Corporation, as Tenant, (herein "Sublessor"), executed
on or about January 28, 1994, for the premises described in the Main Lease,
(herein, "Leased Premises"), a true and correct copy of which Main Lease is
attached hereto as Exhibit "B" and incorporated herein by this reference.
In consideration of the mutual promises contained herein, Sublessor
hereby subleases the Leased Premises to Sublessee, subject to the terms of the
Main Lease, and subject further to the provisions of this Sublease Agreement, as
follows:
1. Sublessee hereby agrees to abide by and observe all the
terms, covenants and conditions of the Main Lease.
2. The term of this Sublease shall be for a term of
twenty-four (24) months, commencing on August 11, 1997, and
ending August 10, 1999, provided, however, that this Sublease
shall sooner terminate upon the termination for any cause
whatsoever of the Main lease.
3. Insofar as the provisions of the Main Lease do not conflict
with the specific provisions of this Sublease Agreement, they
and each of them are incorporated into this Sublease as if
fully completely rewritten herein, and Sublessee agrees to be
bound to the Sublessor by all the terms of the Main Lease (and
applicable rights therein) and to assume towards Sublessor and
perform all the obligations and responsibilities that
Sublessor, by the Main Lease, assumes towards the Lessor,
except for the payment of rent by Sublessee to Sublessor,
which is governed by Paragraph 4 herein. Sublessee and
Sublessor further agree to indemnify and hold harmless one
another from any claim or liability under the Main Lease. The
relationship between Sublessee and Sublessor shall be the same
as that between Sublessor and Lessor under the Main Lease.
4. Sublessee agrees to pay Sublessor, as rent for the Leased
Premises, the sum of two thousand one hundred sixty and 00/100
dollars ($2,160.00), per month, payable in advance on the 1st
day of each calendar month during the term of this Sublease.
In addition, Sublessee agrees to pay to Sublessor monthly
escrow deposits for Tenant Costs as described in Section 2.C.
of the Main Lease, payable in advance on the first day of each
calendar month during the term of this Sublease. The first
monthly installment of $2,807.19 for Base Rent of $2,160.00
and Tenant Costs of $647.19 as set forth above shall be due
and payable on the date hereof.
5. The following events shall be deemed to be events of
default by Sublessee under this Sublease: any events of
default by Sublessee, listed as events of default by Tenant
set forth in the Main Lease, or any default in the provisions
of this Sublease Agreement. Upon the occurrence of any such
events of default, and in addition to any other available
remedies provided by law or in equity, Sublessor shall have
all remedies granted to Lkessor in the Main Lease
6. Upon execution of this Sublease, Sublessee shall deposit
with Sublessor the sum of two thousand one hundred sixty and
00/100 Dollars ($2,160.00), as a security deposit to be held
by Sublessor pursuant to the provisions of the Main Lease.
7. Time is of the essence of this Sublease, and each and all
the terms hereof.
8. Any notice or other communication required or permitted to
be given under this Sublease or under the Main Lease shall be
in writing and shall be deemed to be delivered on the date it
is hand delivered to the party to whom such notice is given,
at the address set forth below, or if such notice is mailed,
on the date on which it is deposited in the United States
Mail, postage prepaid, certified or registered mail, return
receipt requested, addressed to the party to whom such notice
is directed, at the address set forth below:
If to Sublessor:
Mr. Ken J. Harder
X.O. Spec Corporation
4030 W. Braker Lane, Suite 310
Austin, Texas. 78768
If to Sublessee:
Mr. Frank Cano
Allstar Systems, Inc.
4030 W. Braker Lane, Suite 305
Austin, Texas 78768
9. Sublessee shall have no right to assign or sublet any
interest in this Sublease without first obtaining the written
consent of the Lessor and Sublessor, which consent may or may
not be granted by the Lessor or Sublessor in their reasonable
opinion, judgment or discretion, which shall not be
unreasonably withheld
10. Sublessor shall have no liability to Sublessee for any
wrongful action or default on the part of Lessor pursuant to
the terms of the Main Lease, and Sublessee hereby agrees to
look solely to Lessor in event of any such default, the
liability and obligations of Sublessor being solely pursuant
to the terms and conditions of this Sublease Agreement.
11. Sublessor shall agree to pay, at its sole cost, to have
the walls of the demised sublease premises painted. Sublessor
shall have the HVAC and electrical systems in good working
order prior to Lease Commencement. After that, Sublessee shall
accept the sublease premises in its current "as is" condition
and shall be responsible for all interior improvements. These
improvements must comply with Trammell Crow Company's standard
specifications (see Standards and Specifications for
Office/Warehouse Buildings) and all applicable governmental
regulations. Prior to beginning construction of any such
improvements, Tenant shall submit architectural drawings of
the proposed improvements to landlord and shall obtain
Landlord's and Sublessor's written consent to begin
construction, which shall not be unreasonably withheld.
12. On or anytime after May 10, 1998 eitber the Sublessor or
Sublessee may cancel this Sublease with sixty (60) days
written notice to the other party.
13. In the event any one or more of the provisions contained
in this Sublease Agreement shall for any reason be held
invalid illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect
any other provision hereof and this agreement shall be
construed as if such invalid, illegal or unenforceable
provisions had never been contained herein.
14. This agreement constitutes the sole and only agreement of
the parties hereto and supersedes any prior understandings and
written or oral agreements between the parties respecting the
subject matter of this Sublease Agreement.
EXECUTED on the day and year first above written.
SUBLESSOR: SUBLESSEE:
X.O. Spec Corporation, Inc. Allstar Systems, Inc.
By: Printed Name:
Title: Title:
CONSENT BY LESSOR
TRICOHO, Ltd., a Texas limited partnership, Lessor under the Main Lease
referred to in this Sublease Agreement, hereby consents to the foregoing
Sublease Agreement, provided that this Sublease in no way modifies or amends the
Main Lease, and such consent shall not be construed in any way as a consent to
any other sublease of the Premises or assignment of the Lease.
LESSOR:
TRICOHO, Ltd., a Texas limited partnership
By: Palm Springs Co., a Texas Corporation, General Partner
Name: Sarah Puckett
Title: Vice President
ATTACHMENTS
Exhibit "A" - Demised Premises
Exhibit "B" - Main Lease
EXHIBIT "B"
FIRST AMENDMENT TO LEASE AGREEMENT BETWEEN
STONELAKE ASSOCIATES, LTD.
PHONEWORKS, INC. D/B/A ONEPHONE CALL, AS TENANT
To be attached to and form a part of the Lease made the 28th day of January.
1994 (which together with any amendments, modifications and extensions thereof,
is hereinafter called the Lease), between Landlord and Tenant, covering a total
of 2,700 square feet and located at 4030 Braker Lane West, Suite 310, Austin,
Texas, known as Stonelake 3.
WITNESSETH, that the Lease is hereby extended and renewed for a
forty-four (44) months to commence on the 1st day of September, 1996, on
condition that Landlord and Tenant comply with all terms, covernants and
conditions contained in the Lease. The Tenent shall accept the space in its
current "as-is" condition.
WHEREAS, Tenant needs additional space for its business purposes and
Landlord has available an area adjacent hereto.
NOW, THEREFORE, in consideration of the premises, Landlord and Tenant
covenant and agree as follows:
1. Effective May 1, 1997 April 30, 2000, the demised premises shall
contain, in addition to the approximately 2,700 square feet originally demised
(the "existing space"), an additional area, hereinafter called the "new space",
Suite 320, containing approximately 4,991 square feet adfacent thereto (see
Exhibit "A" attached hereto), thus making the aggregate area of the demised
premises approximately 7,691 square feet. Tenant shall accept the "new space" in
its current "as is" condition and all improvements must comply with Landlord's
Standards and Specifications for Office/Warehouse Buildings. Landlord shall
provide a tenant finish allowance of up to $23,255.00 to be applied toward
actual interior improvements constructed in the new space by Tenant.
2. Effective September 1, 1996, the monthly base rental shall be set
forth below:
SQUARE
FOOTAGE OF BASE RENTAL OF SQUARE FOOTAGE BASE RENTAL OF TOTAL BASE
TERM EXISTING SPACE EXISTING SPACE OF NEW SPACE NEW SPACE RENTAL AMOUNT
09/01/96-02/28/97 2,700 $2,025.00 N/A N/A $2,025.00
03/01/97-04/30/97 2,700 $2,160.00 N/A N/A $2,160.00
05/01/97 - 04/30/2000 2,700 $2,160.00 4,991 $4,765.20 $6,925.20
These amounts shall be in addition to property taxes, common area maintenance,
and insurance as provided in the Lease, payable on the first day of each month
during the balance of the term.
3. WITNESSETH that the Lease expressly refers to landlord as Stonelake
Associates, Ltd. The landlord's name has been changed to TRICOHO, Ltd., a Texas
Limited Partnership. The Lease and all related documents are hereby amended such
that all references to "Landlord" or "Stonelake Associates, Ltd." will translate
to mean "TRICOHO, Ltd., a Texas Limited Partnership."
4. WITNESSETH that the Lease expressly refers to Tenant as Phoneworks,
Inc. d/b/a OnePhone Call. The Tenant's name has been changed to X.O. Spec
Corporation (a C-Corporation). The Lease and all related documents are herey
amended such that all references to "Tenant" or "Phoneworks, Inc., d/b/a
OnePhone Call" will translate to mean "X. O. Spec Corporation (a
C-Corporation)".
5. Paragraph 9 of the Lease Agreemeut it hereby amended to name the
Management Company as an additional insured on all Tenant's Liability Insurance
Policies in connection with this Lease.
6. Commencing May 1, 1997, Paragraph 2.C. shall be amended to include
Tenant's proportionate share of management fees as part of Tenant's monthly
escrow deposits on total square footage.
Except as herein and hereby modified and arnended the Agreement of
Lease shall remain in full force and effect and all the terms, provisions,
covenants and conditions thereof are hereby ratified and confirmed.
DATED AS OF THE ______ DAY OF ______________________, 1997.
WITNESS: TRICOHO, Ltd., a Texas Limited Partnership
By: Palm Springs Co., a Texas Corporation,
General Partner
By: Sarah Puckett
Title: Vice President
DATED AS OF THE ___ DAY OF _____________________, 19___.
WITNESS: Phoneworks, Inc. d/b/a OnePhone Call
By: Kenneth J. Harder
Title: President
[DIAGRAM OF EXISTING 2,700 S.F. SPACE AND NEW 4,991 S.F. SPACE]
Exhibit 21.1
List of Subsidiaries of the Company
Name State of Incorporation
Stratasoft, Inc Texas
IT Staffing, Inc. Delaware
Allstar Systems Rio Grande, Inc. Texas
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-09789, on Form S-8, of Allstar Systems, Inc. of our reports dated March 27,
1998, appearing in this Annual Report on Form 10-K of Allstar Systems, Inc. for
the year ended December 31, 1997.
Deloitte & Touche LLP
Houston, Texas
March 31, 1998
EXHIBIT 27.1
EXTRACTEDFROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ALLSTAR SYSTEMS, INC. OF
FINANCIAL DATA SCHEDULE
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DECEMBER 31,
1994 AND 1995 AND JUNE 30, 1996 (UNAUDITED) AND FOR THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
YEAR YEAR YEAR
FISCAL-YEAR-END DEC-31-1995 DEC-31-1996 DEC-31-1997
PERIOD-END DEC-31-1995 DEC-30-1996 DEC-31-1997
CASH 1,029 229 1,581
SECURITIES 0 0 0
RECEIVABLES 16,965 16,876 24,540
ALLOWANCES (464) (219) (249)
INVENTORY 5,407 4,862 4,700
CURRENT-ASSETS 23,274 22,684 31,090
PP&E 1,703 2,692 3,685
DEPRECIATION (717) (1,048) (1,672)
TOTAL-ASSETS 24,266 24,720 33,184
CURRENT-LIABILITIES 21,542 20,393 18,266
BONDS 0 0 0
PREFERRED-MANDATORY 0 0 0
PREFERRED 0 0 0
COMMON 2 27 45
OTHER-SE 2,724 4,327 14,723
TOTAL-LIABILITY-EQUITY 24,266 24,720 33,184
SALES 91,085 120,359 129,167
TOTAL-REVENUES 91,085 120,359 129,167
CGS 79,857 104,302 111,126
TOTAL-COSTS 79,857 104,302 111,126
OTHER-EXPENSES 9,149 12,284 14,386
LOSS-PROVISION 0 0 0
INTEREST-EXPENSE 1,218 1,183 685
INCOME-PRETAX 861 2,590 2,970
INCOME-TAX 342 987 1,126
INCOME-CONTINUING 519 1,603 1,844
DISCONTINUED 0 0 0
EXTRAORDINARY 0 0 0
CHANGES 0 0 0
NET-INCOME 519 1,603 1,844
EPS-PRIMARY .19 .60 .52
EPS-DILUTED .19 .60 .52
Exhibit 99.1
FINANCIAL STATEMENT SCHEDULE II
ALLSTAR SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
AS OF DECEMBER 31, 1997
(In Thousands)
Balance at Charges to Charge to
Beginning Costs and Other Other Balance at
Description of Year Expenses Accounts Changes End of year
Accumulated provision deducted from related assets on balance sheet:
Allowance for doubtful accounts receivable:
1995................................. $ 188 $ 353 $ (77) (A)
$ 464
1996................................. 464 890 (1,135) (A) 219
1997................................. 219 386 (66) (290) (A) 249
Inventory reserves:
1995................................. $ 178 $ 190
$ 368
1996................................. 368 743 (1,000) (A) 111
1997................................. 111 456 (551) (A) 16
Reserves other than those deducted from assets on balance sheet:
Allowance for doubtful vendor accounts receivable:
1995................................. $ 150 $ 155 $ (55) (A)
$ 250
1996................................. 250 119 (169) (A) 200
1997 200..................................... 198 (49)(A) 349
(A) Reductions related to amounts written off.