-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T2BTwTleF5DAktlG0hgBLfgJvYhds4aKLSKncQBYA7ipoXLE/PF/r/EQFx+UiBCA uM0v/mALaKt076rcvNKhRg== 0001047469-99-021407.txt : 19990519 0001047469-99-021407.hdr.sgml : 19990519 ACCESSION NUMBER: 0001047469-99-021407 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXCEL SWITCHING CORP CENTRAL INDEX KEY: 0001036261 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 042992806 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-35791 FILM NUMBER: 99629389 BUSINESS ADDRESS: STREET 1: 255 INDEPENDENCE DR CITY: HYANNIS STATE: MA ZIP: 02601 BUSINESS PHONE: 5088623000 MAIL ADDRESS: STREET 1: 255 INDEPENDENCE DR CITY: HYANNIS STATE: MA ZIP: 02601 FORMER COMPANY: FORMER CONFORMED NAME: EXCEL INC DATE OF NAME CHANGE: 19970325 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 [ ] 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 0-23263 EXCEL SWITCHING CORPORATION --------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-2992806 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 255 Independence Drive ---------------------- Hyannis, Massachusetts 02601 ---------------------------- (Address of principal executive offices) (Zip code) (508) 862-3000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: [X] NO: [ ] As of May 5, 1999, there were 34,482,590 shares of the Registrant's Common Stock, $.01 par value, outstanding. 1 EXCEL SWITCHING CORPORATION FORM 10-Q TABLE OF CONTENTS
Page PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets as of December 31,1998 and March 31, 1999 3 Consolidated Condensed Statements of Income for the three months ended March 28, 1998 and March 31, 1999 4 Consolidated Condensed Statements of Cash Flows for the three months ended March 28, 1998 and March 31, 1999 5 Notes to Consolidated Condensed Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 28 ITEM 2. Changes in Securities and Use of Proceeds 28 ITEM 3. Defaults Upon Senior Securities 29 ITEM 4. Submission of Matters to a Vote of Security Holders 29 ITEM 5. Other Information 29 ITEM 6. Exhibits and Reports on Form 8-K 29 SIGNATURES 30 EXHIBIT INDEX 31
2 EXCEL SWITCHING CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except share and per share data) ASSETS
December 31, March 31, 1998 1999 (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 62,517 $ 58,738 Marketable securities 55,579 66,965 Accounts receivable, net of reserves of $2,000 and $2,500 30,912 36,220 Inventories 5,404 9,476 Deferred tax asset 7,461 7,430 Other current assets 2,013 4,446 ------------- ------------ Total current assets 163,886 183,275 PROPERTY AND EQUIPMENT, NET 18,438 20,674 DEFERRED TAX ASSET 990 3,441 INTANGIBLE ASSETS, NET 9,702 9,360 OTHER ASSETS 5,766 6,480 ------------- ------------ $ 198,782 $223,230 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations $ 3,408 $ 4,262 Accounts payable 5,102 9,428 Accrued expenses 16,874 13,936 Accrued income taxes 6,052 8,223 Deferred revenue 1,047 1,481 Recourse obligation -- 8,495 ------------- ------------ Total current liabilities 32,483 45,825 ------------- ------------ LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 4,858 3,958 -------------- ------------ STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value- Authorized--10,000,000 shares; no shares outstanding -- -- Common stock, $.01 par value- Authorized--100,000,000 shares Issued and outstanding--34,020,043 and 34,465,955 shares at December 31, 1998 and March 31, 1999, respectively 340 345 Additional paid-in capital 101,864 106,443 Deferred compensation (526) (480) Accumulated other comprehensive income 107 51 Retained earnings 59,656 67,088 ------------- ------------ Total stockholders' equity 161,441 173,447 -------------- ------------ $ 198,782 $223,230 ============= ============
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 EXCEL SWITCHING CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited)
Three Months Ended March 28, March 31, 1998 1999 REVENUES $25,556 $36,615 COST OF REVENUES 7,580 10,785 ---------- ----------- Gross profit 17,976 25,830 ---------- ----------- OPERATING EXPENSES: Engineering, research and development 4,726 7,599 Selling and marketing 3,920 4,750 General and administrative 2,418 3,151 ---------- ----------- Total operating expenses 11,064 15,500 ---------- ----------- Income from operations 6,912 10,330 OTHER INCOME, NET 1,648 1,349 ---------- ----------- Income before provision for income taxes 8,560 11,679 PROVISION FOR INCOME TAXES 3,210 4,263 ---------- ----------- NET INCOME $ 5,350 $ 7,416 ========== =========== BASIC EARNINGS PER SHARE $ .16 $ .22 ========== =========== DILUTED EARNINGS PER SHARE $ .14 $ .19 ========== =========== BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 32,645 34,278 DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 38,936 40,027
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 EXCEL SWITCHING CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended March 28, March 31, 1998 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,350 $ 7,416 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 725 1,234 Unrealized gain (loss) on investments 18 (56) Deferred income taxes (470) (2,420) Compensation expense associated with the grant of stock options, net of forfeitures 40 96 Changes in assets and liabilities- Accounts receivable (1,205) (5,308) Inventories (869) (4,072) Prepaid taxes 122 -- Other current assets (579) (2,433) Accounts payable 135 4,327 Accrued expenses 2,386 (2,938) Accrued income taxes 1,013 6,028 Deferred revenue -- 434 Recourse obligation -- 8,495 ---------- --------- Net cash provided by operating activities 6,666 10,803 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,853) (3,128) Purchases of marketable securities, net (430) (11,386) Increase in other assets -- (714) ---------- --------- Net cash used in investing activities (3,283) (15,228) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term obligations (3,179) (46) Issuance of stock under employee stock purchase plan -- 214 Proceeds from the exercise of stock options 54 478 ---------- --------- Net cash used in financing activities (3,125) 646 ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 258 (3,779) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 47,968 62,517 ---------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $48,226 $ 58,738 ========== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for- Interest $ 22 $ 210 ========== ========= Taxes $ 2,545 $ 598 ========== =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1 - Interim Consolidated Condensed Financial Statements The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnote disclosure required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes of Excel Switching Corporation (the "Company") for the year ended December 31, 1998 as reported in the Company's Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The consolidated condensed balance sheet presented as of December 31, 1998 has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The results of operations for the three months ended March 31, 1999 may not be indicative of the results that may be expected for the year ended December 31, 1999, or for any other period. Note 2 - Earnings Per Share Basic earnings per share was determined by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per share was determined by dividing net income by diluted weighted average shares outstanding. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options based on the treasury stock method. The calculations of basic and diluted weighted average shares outstanding are as follows (in thousands):
Three Months Ended ------------------------------------------------ March 28, 1998 March 31, 1999 ------------------- ----------------------- Basic weighted average common shares outstanding 32,645 34,278 Weighted average common equivalent shares 6,291 5,749 ------- ------- Diluted weighted average shares outstanding 38,936 40,027 ======= =======
Note 3 - Comprehensive Income Comprehensive income for the three month periods ended March 28, 1998 and March 31, 1999 is approximately $5,361,000 and $7,380,000, respectively. The difference between comprehensive income and net income relates to unrealized gains and losses on marketable securities. Note 4 - Significant Customers During three month period ended March 31, 1999, there were no customers that generated 10% or more of the Company's total revenues. During the three month period ended March 28, 6 1998, significant customers that generated 10% or more of the Company's total revenues were as follows: Significant Customer A 22.2% Significant Customer B 10.2% Significant Customer C 10.2%
Note 5 - Lease Program In March 1999, the Company entered into an arrangement with a leasing entity to enable the Company's customers to finance the purchase of Excel equipment. Under the terms of this arrangement, the Company has a recourse obligation in the amount of the greater of $2,000,000 or 20% of the aggregate net book value of annual equipment sales financed. In addition, the Company has a 100% recourse obligation for contracts funded for customers with certain credit ratings, as determined by the leasing entity. During the first quarter of 1999, the Company sold approximately $7.9 million of equipment under sales-type lease agreements to this leasing entity. In addition, the Company sold to this entity an existing receivable of approximately $1.0 million. The Company's total recourse obligation at March 31, 1999 is approximately $8.5 million. Due to the credit ratings of certain of these customers and the related recourse obligations, the Company determined it was appropriate to record the related $7.5 million of revenue ratably as the lease payments are received or until such time as collection of the underlying lease payments can be reasonably assured. Note 6 - Acquisition of RAScom, Inc. On May 10, 1999, the Company completed an acquisition of RAScom, Inc., a provider of open remote access server technology. Under terms of the agreement, Excel acquired all outstanding shares and options of RAScom in exchange for up to 1.1 million shares of Excel common stock. The transaction is intended to be accounted for as a pooling-of-interests transaction and qualify as a tax-free reorganization. Accordingly, the Company's financial statements for the period ended June 30, 1999 will reflect the combined results of both entities. In addition, financial results for previous periods will be restated to reflect the combined operations for both entities. Based on the closing price of Excel common stock on the date of closing, the transaction is valued at approximately $23.9 million. During the second quarter of 1999, the Company expects to record a one-time charge for acquisition related expenses of an amount estimated to be approximately $2 million. Information regarding the pro forma results for the first quarter of 1999 reflecting the acquisition is not currently available, however, such information will be provided in the Company's Form 8-K filing in June 1999. 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussions contain statements which may be "forward-looking" statements and are subject to risks and uncertainties that could cause actual results to differ significantly from expectations. In particular, statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are not historical facts, including, but not limited to, statements regarding the anticipated adequacy of cash resources to meet the Company's working capital requirements; anticipated payment terms relating to accounts receivable; statements regarding the anticipated proportion of revenues to be derived from a limited number of customers; anticipated revenues from Qualcomm; statements regarding the Company's recourse obligation under its lease program; unanticipated costs and difficulties with integrating the operations, products and personnel of acquired businesses, including RAScom; anticipated extension of the bank line of credit agreement; statements regarding the size of the expected one-time charge for acquisition-related expenses; and statements regarding the Company's readiness for Y2K, may constitute forward-looking statements. Factors that might cause such a difference include those relating to: fluctuations in quarterly results of operations; dependence on and concentration of relationships with application developers, original equipment manufacturers (OEMs) and systems integrators; risks relating to lease financing; length of sales cycle; concentration of customers; dependence on single and sole source suppliers; dependence on third-party manufacturers; and management of growth and hiring of additional personnel. Other factors may include, but are not limited to, those relating to the evolving market for telecommunication services; concentrated product family; risk of new product introductions; rapid technological change; risks relating to acquisitions; difficulty of integrating two companies; difficulty of integrating RAScom product lines; uncertainties relating to integration of operations; need to integrate and retain key employees of RAScom; risks related to failure to achieve beneficial synergies; risks related to sales to end-users; dependence on key personnel; highly competitive market; and compliance with regulations and evolving industry standards; dependence on proprietary rights; risks associated with international sales; risks associated with litigation and other risks identified in the Company's Securities and Exchange Commission filings including those risks identified in the section entitled "Risk Factors" of the Company's Annual Report for the fiscal year ended December 31, 1998 on Form 10-K. Overview Excel Switching Corporation (the "Company") is a leading provider of open switching platforms for telecommunications networks worldwide. The Company develops, manufactures, markets and supports a family of open, programmable, carrier-class switches that address the complex enhanced services and wireless and wireline infrastructure needs of network providers. Excel's products offer network providers the flexibility to address multiple market applications and the scalability to deploy a variety of system capacities. The Company's programmable switching platforms enable network providers to deliver improved networking functionality at a lower cost than purchasing, upgrading or reprogramming traditional, closed, central office switches. Excel offers a family of programmable switching platforms that are designed with distributed architecture and open software to maximize performance and provide multiple levels of programmability and redundancy. Excel's open switching platforms integrate with a wide variety of host computer systems, operating systems and application development environments. The Company's product family scales from approximately 100 to 30,720 ports. Using Excel's patented Programmable Protocol Language ("PPL"), application developers can customize the 8 switching software to their unique requirements, allowing them to introduce new services and applications rapidly. As customer requirements evolve, the Excel platform can be upgraded without requiring extensive and complex programming changes to the underlying software. The Company sells to a variety of customers in the worldwide telecommunications market. Excel's customers integrate the Company's open, programmable switching platforms with their product offerings to address a variety of market applications for network providers, ranging from enhanced services such as voice messaging, one number services and prepaid debit cards, to wireless and wireline infrastructure services such as tandem, end-office, mobile switching centers, intelligent base station controllers and wireless local loop. Excel's products and technology are contained within the framework of Open Network Expansion Architecture ("ONE Architecture(TM)"). ONE Architecture is Excel's concept that its switching systems provide an open, scalable and cost-effective solution for the telecommunication needs of network providers. ONE Architecture encompasses a family of switching products and related embedded software technologies. Recent Acquisition On May 10, 1999, the Company completed an acquisition of RAScom, Inc., a provider of open remote access server technology. Under terms of the agreement, Excel acquired all outstanding shares and options of RAScom in exchange for the right to receive up to 1.1 million shares of Excel common stock. The transaction is intended to be accounted for as a pooling-of-interests transaction and qualify as a tax-free reorganization. Accordingly, the Company's financial statements for the period ended June 30, 1999 will reflect the combined results of both entities. In addition, financial results for previous periods will be restated to reflect the combined operations for both entities. During the second quarter of 1999, the Company expects to record a one-time charge for acquisition related expenses of an amount estimated to be approximately $2 million. Management anticipates that the acquisition of RAScom will expand Excel's addressable market by adding data capabilities to the EXS product line. See Footnote 6 of Notes to Consolidated Condensed Financial Statements. 9 Results of Operations The following table sets forth, for the periods indicated, the percentage of revenues represented by certain items reflected in the Company's Consolidated Condensed Statements of Income:
Three Months Ended ------------------------------------------------------------ March 28, March 31, 1998 1999 ---- ---- Revenues................................... 100.0% 100.0% Cost of revenues........................... 29.7 29.5 ------ ------ Gross profit...................... 70.3 70.5 ------ ------ Operating expenses: Engineering, research and development....................... 18.5 20.7 Selling and marketing.................. 15.3 13.0 General and administrative............. 9.5 8.6 ------ ------ Total operating expenses.......... 43.3 42.3 ------ ------ Income from operations............ 27.0 28.2 Other income, net.......................... 6.5 3.7 ------ ------ Income before provision for income taxes................... 33.5 31.9 Provision for income taxes................. 12.6 11.6 ------ ------ Net income................................. 20.9% 20.3% ====== ======
Three Months Ended March 28, 1998 and March 31, 1999 Revenues. The Company's revenues consist of sales of its open, programmable switching platforms and related components. Revenues increased 43% from $25.6 million in the three months ended March 28, 1998 to $36.6 million for the comparable period in 1999. The Company believes that the increase resulted from a number of factors. The Company's efforts to enhance the scalability, performance, capacity and functionality of its products has contributed to an increased interest in Excel's programmable switching platforms as a means of addressing the evolving needs of the telecommunications industry. This includes enhancements in the areas of switch management, PPL and SS7 as well as in infrastructure solution offerings. Over the past several years, the Company's customer base has also broadened, resulting in increased sales from a larger number of sources. The introduction of new or enhanced offerings by this growing customer base as well as the expansion of their markets resulted in an increased demand for Excel's products. Excel also increased its efforts to provide customers with assistance in designing, planning and testing new customer applications. The Company expanded or established relationships with a growing number of network service providers, resulting in an increased amount of direct sales to end-users. Revenues also benefited by the expansion of the selling and marketing organizations, including the establishment of two international sales offices in 1998. 10 Revenues from the Company's five largest customers represented approximately 55.6% and 29.7% of the Company's revenues for the first quarters of 1998 and 1999, respectively. In the first quarter of 1999, no single customer represented 10% or more of the Company's total revenue. During the comparable 1998 period, the following customers represented greater than 10% of the Company's revenue: Qualcomm Incorporated represented approximately 22.2%; Comverse Network Systems (Comverse) represented approximately 10.2%; and Brite Voice Systems, Inc. represented approximately 10.2%. The Company anticipates that revenues in 1999 from the Company's largest customer of 1998, Qualcomm Incorporated, will decrease from the previous two fiscal years on both an absolute dollar and percentage of sales basis. Although the Company's largest customers have varied from period to period and the customer base continues to broaden, the Company believes that revenues derived from current and potential large customers will continue to represent a significant proportion of revenues, and that its results of operations in any given period will continue to depend to a significant extent upon sales to a limited number of customers. The volume of future purchases, if any, by the Company's principal customers cannot be estimated based upon historical purchasing trends. Revenues from the Company's largest customers may significantly fluctuate period to period on both an absolute dollar basis and as a percentage of sales. Gross Profit. Cost of revenues consists primarily of the cost of purchased components and subassemblies, contract manufacturing costs, labor and overhead relating to material procurement, final assembly, testing and quality control, and warranty and post-sale support costs. Cost of revenues increased 42.3% from $7.6 million in the three months ended March 28, 1998 to $10.8 million for the comparable period in 1999. Gross margin increased from 70.3% in the first quarter of 1998 to 70.5% in the comparable period of 1999. The increase in cost of revenues is attributable to the increase in sales volume. Engineering, Research and Development. Engineering, research and development costs consist primarily of compensation and benefit related costs of engineering and development personnel, materials and supplies consumed in prototype development and related facility and equipment costs. Engineering, research and development costs increased 60.8% from $4.7 million in the first quarter of 1998 to $7.6 million for the comparable period in 1999. As a percentage of revenues, these costs were 18.5% and 20.7%, respectively, in such periods. The increase in engineering, research and development costs in absolute dollars was primarily attributable to an increase in engineering and research personnel. Selling and Marketing. Selling and marketing costs consist primarily of compensation and benefit related costs for sales, marketing and customer support personnel, travel, promotional activities and related facility costs. Selling and marketing costs increased 21.2% from $3.9 million in the first quarter of 1998 to $4.8 million for the comparable period of 1999. As a percentage of revenues, these costs were 15.3% and 13.0%, respectively, in such periods. The increase in selling and marketing costs in absolute dollars was primarily attributable to an increases in sales, marketing and customer support personnel, promotional activities and costs related to the international offices established in 1998. General and Administrative. General and administrative costs include compensation and benefit related costs of management, finance, information technology and administrative personnel, professional services, costs to maintain manufacturing and management information systems, goodwill amortization and other general corporate expenses. General and administrative costs increased 30.3% from $2.4 million in the first quarter of 1998 to $3.2 11 million for the comparable period in 1999. As a percentage of revenues, these costs were 9.5% and 8.6%, respectively, in such periods. The increase in general and administrative costs in absolute dollars was primarily attributable to increases in bad debt expense and amortization of goodwill as well as professional fees associated with recruiting, acquisition activities and litigation. See Part II, Item 1, Legal Proceedings. Other Income. Other income is primarily composed of interest income, offset by interest expense. Other income decreased 18% from $1.6 million in the first quarter of 1998 to $1.3 million for the comparable period in 1999. This decrease was primarily attributable to the interest expense associated with $8.2 million of acquisition related long-term obligations issued in 1998. Provision For Income Taxes. The Company's effective rate for Federal and state income taxes was approximately 37.5% and 36.5% for the first quarters of 1998 and 1999, respectively. The decrease is effective tax rates is primarily attributable to a decrease in the effective state income tax rate and the utilization of certain tax credits. Liquidity and Capital Resources At March 31, 1999, the Company's principal sources of liquidity consisted of cash, cash equivalents and marketable securities of approximately $125.7 million, working capital of approximately $137.5 million and $15.0 million of funds available under a bank line of credit. At December 31, 1998, the Company had $118.1 million invested in cash, cash equivalents and marketable securities. Net cash provided by operations for the three months ended March 28, 1998 and March 31, 1999 totaled $6.7 million and $10.8 million, respectively. The increase in 1999 was primarily the result of proceeds received under the lease program with a leasing entity offset by an increase in accounts receivable and inventories. During the first quarter of 1999, the Company's accounts receivable increased $5.3 million or 17% from December 31, 1998. Management believes this increase is due to a number of factors including the timing of order placements and shipments within the quarter and an increase in sales to international customers and to network providers and other end-users. Sales to such customers typically require longer payment terms than the Company historically has extended to its established customer base. The Company expects this trend to continue as it seeks to increase revenues and further expand its business internationally and with network service providers. In March 1999, the Company entered into an arrangement with a leasing entity to enable the Company's customers to finance the purchase of Excel equipment. Under the terms of this arrangement, the Company has a recourse obligation in the amount of the greater of $2,000,000 or 20% of the aggregate net book value of annual equipment sales financed. In addition, the Company has a 100% recourse obligation for contracts funded for customers with certain credit ratings, as determined by the leasing entity. During the first quarter of 1999, the Company sold approximately $7.9 million of equipment under sales-type lease agreements to the leasing entity. In addition, the Company sold an existing receivable of approximately $1.0 million to the leasing entity. The Company's total recourse obligation at March 31, 1999 is approximately $8.5 million. 12 During the first quarter of 1999, inventories increased approximately 75% or $4.1 million from December 31, 1999. This increase was primarily due to the timing of the purchase and receipt of inventory components prior to the end of the quarter. Net cash used in investing activities for the three months ended March 28, 1998 and March 31, 1999 totaled $3.3 million and $15.2 million, respectively. The increase primarily relates to an increase in the dollar amount of investments purchased in 1999 with maturity dates of ninety-one days or greater. The Company's existing unsecured bank line of credit arrangement expires in June 1999. Management is presently negotiating a possible extension of this agreement and believes that such an extension will be finalized prior to the expiration of the credit agreement. The Company believes that available cash and investments and cash funds generated from operations will be sufficient to meet the Company's anticipated cash requirements for working capital and capital expenditures for at least the next twelve months. Year 2000 Readiness Disclosure Statement Many currently installed computer systems and software products are designed to accept only two-digit entries in the date code field. As a result, they may have problems properly recognizing 1/1/00 as January 1, 2000. In less than a year, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" or "Y2K" requirements. Significant uncertainty exists in the computer software, hardware and telecommunications industries concerning the potential effects associated with the Year 2000 issue. The Company has instituted a program to review the Y2K compliance status of the Company's product offerings and the software and systems used in its internal business processes. Suppliers of the components that make up Excel's products, as well as service suppliers, are being contacted as part of the Company's Y2K assessment. In July 1998, Excel received ITAA*2000 certification from ITAA (Information Technology Association of America). ITAA's review examined eleven discrete process areas deemed necessary for a successful Y2K conversion. ITAA's certification indicates that Excel meets the information technology's best software development practices for addressing the Year 2000 issue. The Company has integrated Y2K testing into the development process for all of its products. The Company has reviewed its entire EXS family of products, which includes the EXS and the products formerly named the LNX and CSN. The Company believes that its entire EXS family of products is generally Y2K compliant. Accordingly, the use or occurrence of dates on or after January 1, 2000 and the occurrence of leap years will not affect the performance of the Company's products with respect to the ability of such products to correctly create, store, process and output information related to such date data. Excel's programmable switches are controlled by a host computer owned and operated generally by a customer or end user, and are typically integrated into telecommunication applications by application developers, original equipment manufacturers and system integrators or other third parties. Excel's switch software is embedded, real time software. By design, date values are rarely used in Excel's products. The Company found no discrepancies with Y2K or leap year date processing during its internal testing. Excel believes that the PCX product line will also function properly with a host computer using DOS version 6.22 and beyond. This belief is based on an engineering review and internal test results of the PCX product line. 13 The Company has also reviewed the product offerings resulting from the acquisitions of XNT and Quantum for Y2K compliance and believes they are generally Y2K compliant. Prior to being acquired by Excel, both XNT and Quantum performed their own Y2K assessment. Quantum's products use a 4-digit date code and, therefore, have no known Y2K problems. Excel received test reports from XNT verifying that XNT's NT-based ADS software from version 5.14.98 forward had passed their internal Y2K testing. The DOS-based ADS software is currently undergoing testing. These products and their related product development processes are currently being integrated into Excel's existing, ITAA-approved process for the development, test and release of enhancements. Excel's primary internal information systems used to support its operations (specifically, its ERP system, individual servers and workstations and common office applications) have either been researched to be Y2K compliant or are in the process of being upgraded. The Company is expects to be fully compliant by the end of the third quarter with regard to its ERP system, individual servers and workstations and common office applications. The Company is in the process of contacting its major customers and critical suppliers of components, equipment and services to determine whether products and services obtained by the Company from such vendors or sold by the customer to third parties are Y2K compliant. The Company's suppliers and customers are under no contractual obligation to provide such information to the Company. The Company intends to continue its efforts to monitor the Y2K compliance of suppliers and major customers. Based on the information available to date, the Company believes it will be able to complete its Y2K compliance review and make modifications, if necessary, prior to the end of 1999. The Company is prioritizing its efforts to focus on Y2K discrepancies that would significantly impact operations. Nevertheless, to the extent the Company is relying on vendors or suppliers to notify Excel or resolve Y2K issues within their own products, the Company may experience delays in implementing such changes. If key systems, or a significant number of systems were to fail as a result of Y2K problems, the Company could incur substantial costs and disruption of its business, which would potentially have a material adverse effect on the Company's business and results of operations. In addition, because the Company purchases many critical components from single or sole-source suppliers, failure of any such supplier to adequately address issues relating to the Y2K problem in its own products or internal systems may have a material adverse effect on the Company's business, financial condition and results of operations. Because a majority of the Company's products are sold through application developers, original equipment manufacturers and system integrators or other third parties, users of the Company's products may experience Y2K problems as a result of the integration of the Company's Y2K compliant products with noncompliant Y2K products of third party suppliers. In certain circumstances, the Company has warranted to customers that the use or occurrence of dates on or after January 1, 2000 will not adversely affect the performance of the Company's products with respect to the ability to create, store, process and output information related to such date data. If any of these customers experience Y2K problems, such customers could assert claims for damages against the Company. To date, the Company has not required a complete and separate budget for investigating and remedying issues related to Y2K compliance of the Company's own products or the software 14 underlying systems used in its internal operations. The costs of Excel's Y2K initiative have been incorporated into existing workloads and budgets within the quality, engineering and information technology departments, and are not expected to be material to the Company's results of operations or financial position. Management expects to develop a contingency plan in the third quarter of 1999 based upon the results of Excel's supplier and customer readiness reviews. To the extent the Company has not adequately assessed its Y2K compliance, additional or significant Company resources may be spent on investigating and remedying Y2K issues and the expenditure of such resources may have a material adverse effect on the Company's business, financial condition and results of operations in the future. Factors That May Affect Future Operating Results Statements contained in this Quarterly Report on Form 10-Q that are not historical fact may constitute forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results of operations and financial condition may in the future vary significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks, uncertainties and other information discussed within this Quarterly Report on Form 10-Q and other risks identified in the Company's Securities and Exchange Commission filings, including those risks identified in the Company's Annual Report for the fiscal year ended December 31, 1998 on Form 10-K. The following discussion of the Company's risk factors should be read in conjunction with the consolidated financial statements and related notes thereto set forth elsewhere in this report and in the Company's Annual Report for the fiscal year ended December 31, 1998 on Form 10-K. The following factors, among others, could cause actual results to differ materially from those set forth in forward-looking statements contained or incorporated by reference in this report and presented by management from time to time. Such factors, among others, may have a material adverse effect upon the Company's business, results of operations and financial condition: Fluctuations in Results of Operations. The Company's results of operations have varied significantly in the past and may vary significantly in the future, on a quarterly and annual basis, as a result of a variety of factors, many of which are outside the Company's control. These factors include, without limitation: (i) the timing and size of orders which are received and can be shipped in any particular period; (ii) the commercial success of the Company's products; (iii) delays in the introduction of products or product enhancements by the Company and the Company's ability to introduce new products and technologies on a timely basis; (iv) the financial stability of the Company's major customers; (v) the timing of new product introductions or announcements by the Company or its competitors; (vi) the availability of adequate supplies of key components and assemblies and the adequacy of third-party manufacturing capabilities; (vii) the seasonality of the placement of customer orders; (viii) the timing and nature of selling and marketing expenses such as tradeshows and advertising campaigns; (ix) the timing of development expenditures and personnel changes; (x) the publication of opinions about the Company and its products, or its competitors or their products, by industry analysts; (xi) customer order deferrals in anticipation of product enhancements or new product offerings by the Company or its competitors; and (xii) customer cancellation of orders and the gain or loss of significant customers, including those due to industry combinations. Moreover, any downturn in general economic conditions could precipitate significant reductions in corporate spending for 15 telecommunications infrastructure, which could result in delays or cancellations of orders for the Company's products. The Company's expense levels are relatively fixed and are based, in significant part, on expectations of future revenues. Consequently, if revenue levels are below expectations, expense levels could be disproportionately high as a percentage of revenues, and the Company's business, financial condition and results of operations would be materially adversely affected. The Company has historically operated with little backlog because the Company generally ships its products within 60 days of acceptance of an order. As a result, revenues in any quarter are substantially dependent on orders booked and shipped in that quarter and on sales by the Company's customers to end users. The Company has experienced significant fluctuations in revenues, expenses and results from operations from quarter to quarter, and such fluctuations are likely to continue. The Company typically receives more product orders and generates greater revenues in the fourth quarter. During the last several years, revenues in the first quarter have typically been lower than those recorded in the preceding fourth quarter. The Company believes that this concentration of order placements in specific quarterly periods is due to customers' buying patterns and budgeting cycles. A significant portion of the Company's revenues have been generated from a limited number of customers and it is difficult to predict the timing of future orders and shipments to these and other customers. The Company anticipates that its results of operations in any given period will continue to depend to a significant extent upon sales to a small number of customers. The Company also believes that the purchase of its products generally involves a significant commitment of a customer's capital resources. Therefore, any downturn in any customer's business could have a material adverse effect on the Company's revenues, business, financial condition and quarterly results of operations. In addition, the Company historically has recognized a large portion of its revenues from sales booked and shipped in the last month of a quarter such that the magnitude of quarterly fluctuations may not become evident until late in, or at the end of, a particular quarter. Because a number of the Company's individual orders are for significant amounts, the failure to ship a significant order in a particular quarter could materially adversely affect revenues and results of operations for such quarter. To the extent that significant sales occur earlier than expected, results of operations for subsequent quarters may be materially adversely affected. Due to these and other factors, the Company's quarterly revenues, expenses and results of operations could vary significantly in the future, and period-to-period comparisons should not be relied upon as indications of future performance. The Company's ability to increase its revenues in future periods, sustain its level of revenues in future periods or sustain its rate of revenue growth on a quarterly or annual basis cannot be assured. Due to all of the foregoing factors, it is possible that in some future quarter, the Company's results of operations will be below the expectations of public market analysts and investors. In such event, the market price of the Company's Common Stock would likely be materially adversely affected. Concentration of Customers. During the three months ended March 31, 1999, the Company's five largest customers accounted for approximately 29.7% of the Company's revenues. During 1998's first quarter and fiscal 1998, the Company's five largest customers accounted for approximately 55.6% and 45.0%, respectively, of the Company's revenues. Although the Company's largest customers have varied from period to period and the customer base continues to broaden, the Company anticipates that its results of operations in any given period will continue to depend to a significant extent upon sales to a small number of customers. 16 None of the Company's customers have entered into a long-term supply agreement requiring any of them to purchase a minimum amount of product from the Company. Revenues from the Company's largest customers may significantly fluctuate period to period on both an absolute dollar basis and as a percentage of sales. The Company anticipates that revenues in 1999 from the Company's largest customer of 1998, QUALCOMM Incorporated, will decrease from the previous two fiscal years on both an absolute dollar and percentage of sales basis. It is unknown whether the Company's principal customers will continue to purchase product from the Company at current levels, if at all, or whether the Company will be able to replace such purchases with sales to other customers. The loss of one or more major customers could have a material adverse effect on the Company's business, financial condition and results of operations. Highly Competitive Market. The market for telecommunications products is highly competitive and subject to rapid technological change. The telecom industry has also been subject to rapid consolidation of equipment and suppliers by larger telecom and data network service providers. The Company competes or may compete directly or indirectly with the following categories of companies: (i) other manufacturers of programmable switches such as Cisco Systems, Inc. (primarily through its recent acquisition of Summa Four, Inc.), Redcom Laboratories, Inc. and Harris Corporation; (ii) large, well-established switch and telecommunications equipment manufacturers such as Alcatel Alsthom Compagnie Generale d'Electricite SA, Lucent Technologies Inc., Northern Telecom Limited, Siemens AG and Telefonaktiebolaget LM Ericsson; and (iii) to a lesser degree, systems integrators and application developers whose switches are based on PC card-level products manufactured by companies such as Aculab Inc., Dialogic Corporation and Natural MicroSystems Corporation. In addition, the Company may be subject to competition from several smaller companies that have begun to manufacture programmable switching platforms as well as from emerging data communications equipment manufacturers. Due to the rapidly evolving markets in which the Company competes, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter those markets, thereby further intensifying competition. Additionally, one or more of the Company's application developers may begin to develop or market products in competition with the Company. Increased competition could result in price reductions and loss of market share which would materially adversely affect the Company's business, financial condition and results of operations. Many of the Company's current and potential competitors have significantly greater financial, selling and marketing, technical, manufacturing and other resources than the Company. Some of the Company's competitors currently offer financing alternatives to their customers. The Company has recently established a relationship with an independent leasing company to offer a financing alternative to some or all of Excel's customers. It is not certain that financing alternative provided by this relationship will be on terms that are competitive with the financial offerings of the Company's competitors. It is not certain the Company will continue to offer such financing alternatives in the future. Moreover, the Company's competitors may also foresee the course of market developments more accurately than the Company. Although the Company believes it has certain technological and other advantages over its competitors, realizing and maintaining such advantages will require a continued high level of investment by the Company in research and product development, marketing and customer service and support. It is not certain that the Company will have sufficient resources to continue to make such investments or that the Company will be able to make the technological advances necessary to compete successfully with its existing competitors or with new competitors. 17 Year 2000 Compliance. The Company has implemented a Year 2000 compliance program designed to ensure that the Company's computer systems and applications will function properly beyond 1999. The Company believes that adequate resources have been allocated for this purpose and expects the Company's Year 2000 date conversion programs to be completed on a timely basis. The Company does not expect to incur significant expenditures to address this issue. However, there can be no assurance that the Company will identify all Year 2000 problems in its computer and other systems in advance of their occurrence or that the Company will be able to successfully remedy any problems that are discovered. The expenses of the Company's efforts to address such problems, or the expenses or liabilities to which the Company may become subject as a result of such problems, could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the revenue stream and financial stability of existing customers may be adversely impacted by Year 2000 problems, which could cause fluctuations in the Company's revenues and operating profitability and which could have a material adverse effect on the Company's business, results of operations and financial condition. If key systems, or a significant number of systems were to fail as a result of Y2K problems, the Company could incur substantial costs and disruption of its business, which would potentially have a material adverse effect on the Company's business and results of operations. In addition, because the Company purchases many critical components from single or sole-source suppliers, failure of any such supplier to adequately address issues relating to the Y2K problem in its own products or internal systems may have a material adverse affect on the Company's business, financial condition and results of operations. In certain circumstances, the Company has warranted to customers that the use or occurrence of dates on or after January 1, 2000 will not adversely affect the performance of the Company's products with respect to the ability to create, store, process and output information related to such date data. If any of these customers experience Y2K problems, such customers could assert claims for damages against the Company. To the extent the Company has not adequately assessed its Y2K compliance, additional or significant Company resources may be spent on investigating and remedying Y2K issues and the expenditure of such resources may have a material adverse effect on the Company's business, financial condition and results of operations in the future. Dependence on Relationships with Application Developers, OEMs and Systems Integrators. The Company sells a significant amount of its products to, and maintains strategic relationships with, application developers, original equipment manufacturers and systems integrators which incorporate the Company's products into their service and product offerings. As a result, sales of the Company's products are dependent upon the continued market acceptance of the service and product offerings of the Company's customers. Although the Company maintains contractual relationships with a substantial number of its customers, such contracts do not provide for minimum purchase requirements, nor do they contain provisions requiring the exclusive purchase of the Company's products. The development of an application or service for the telecommunications market can involve a substantial amount of time and expense. The delay or failure of a customer's application development program incorporating the Company's products could delay or prevent expected sales of the Company's products. The inability or cessation of customers to integrate the Company's products into their service and product offerings, product development delays by application developers and other customers, lack of market acceptance of the service and product offerings of the Company's customers or a customer's decision to market products manufactured by a competitor of the Company, or the manufacture of such products themselves, would have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, selling through indirect channels may limit the Company's information concerning the volume of products sold by the Company's customers to end users and the Company's contact with its end users. As a result, the Company's ability to forecast revenues accurately (notwithstanding the forecasts of its customers), evaluate end-user satisfaction and recognize emerging end-user requirements may be hindered. Risks Related to Lease Financing. In March 1999, the Company entered into an arrangement with a leasing entity to enable the Company's customers to finance the purchase of Excel equipment. Under the terms of this arrangement, the Company has a recourse obligation in the amount of the greater of $2,000,000 or 20% of the aggregate net book value of annual equipment sales financed. In addition, the Company has a 100% recourse obligation for contracts funded for customers with certain credit ratings, as determined by the leasing entity. It is not certain that financing alternative provided by this relationship will be on terms that are competitive with the financial offerings of the Company's competitors. It is not certain the 18 Company will continue to offer such financing alternatives in the future. Since Excel is obligated to guarantee the payments to the leasing entity, the default by one or more customers of their payment obligations to the leasing entity under this program may have a material adverse impact on the Company's business, financial condition and results of operations. In addition, such default may have an adverse impact on the Company's ability to continue to offer such alternative financing to its customers. Dependence on Single and Sole Source Suppliers and Third-Party Manufacturers. The Company purchases many critical component from single or sole source vendors and relies upon a limited number of independent manufacturers, some of which are small, privately-held companies, to provide certain components and assemblies made to the Company's specifications. In addition, from time to time Company relies upon certain third-party software application vendors to supply certain software applications used with the Company's switching products. The inability to develop alternative sources for these products or to obtain sufficient quantities of these products could result in delays or reductions in product shipments which could materially adversely affect the Company's business, financial condition and results of operations. In the event of a reduction or interruption of supply, a significant amount of time, in some cases as much as three to four months, could be required before the Company would begin receiving adequate supplies from such alternative suppliers. Further, in such event, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, the manufacture of certain of these single or sole source components is extremely complex, and the Company's reliance on the suppliers of these components exposes the Company to potential production difficulties and quality variations, which could negatively impact cost and timely delivery of the Company's products. Certain components and applications are available from only one supplier, for which there is no substitute at this time. If supply of these components should cease, the Company would be required to redesign its products or stop providing such applications with its products. It is not certain that supply problems will not occur or, if such problems do occur, that satisfactory solutions would be available. The Company does not have long-term contracts with its suppliers and therefore it is not certain that these suppliers will continue to be able to produce these components or to meet the Company's requirements. Any significant interruption in the supply, or degradation in the quality, of any such component could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company generally requires its customers to submit quarterly forecasts of their needs, the Company's customers frequently require rapid delivery after placement of a purchase order. Because the Company does not maintain significant component inventories, a delay in shipment by a supplier could lead to lost sales. Lead times for materials and components may vary significantly and depend on factors such as specific supplier performance, contract terms and general market demand for components. If orders vary from forecasts, the Company may experience excess or inadequate inventory of certain materials and components. While the Company has not experienced shortages and allocations of these components to date, any shortages in the future, including those occasioned by increased sales, could result in delays in fulfillment of customer orders. Such delays, shortages and allocations could have a material adverse effect on the Company's business, financial condition and results of operations. Evolving Market for Telecommunications Services and Rapid Technological Change. The Company's future success will depend on continued growth in the market for telecommunications services. The global telecommunications marketplace is evolving and it is difficult to predict its potential size or future growth rate. It is not known whether deregulation 19 and continued improvements and expansions of infrastructure will continue to cause this market to grow or that increased regulation will not present barriers to the sales of existing or future products. In addition, telecommunications applications and infrastructure needs may emerge for which the Company's products are not designed. If this market fails to grow or grows more slowly or in a different direction than the Company currently anticipates, the Company's business, financial condition and results of operations could be materially adversely affected. The telecommunications equipment market is also subject to rapid technological change, evolving industry standards and frequent new product introductions and enhancements that may render existing products obsolete. As a result, the Company's position in this market could erode rapidly due to unforeseen changes in product features and functions of competing products. The Company's growth and future results of operations will depend in part on its ability to respond to these changes by enhancing its existing products and developing and introducing, on a timely and cost-effective basis, new products and features to meet or exceed technological advances in the marketplace. The failure of the Company to respond to rapidly changing technologies could have a material adverse effect on the Company's business, financial condition and results of operations. Risks Relating to Acquisitions. In May 1999, the Company acquired RAScom, Inc. During the fourth quarter of 1998, the Company acquired Quantum Telecom Solutions, Inc. and XNT Systems, Inc. The Company may also, from time to time, pursue the acquisition of other companies, assets, products and technologies. Acquisitions involve a number of operating risks that could materially adversely affect the Company's results of operations, including the diversion of management's attention to assimilate the operations, products and personnel of the acquired companies, the acquired company's existing customer and support obligations, the amortization of acquired intangible assets and the potential loss of key employees of the acquired companies. Furthermore, acquisitions may involve businesses in which the Company lacks experience. Because management and the Company have limited experience in acquisitions and integrating acquired companies or technologies into its operations, it is not certain that the Company will be able to manage present and future acquisitions successfully, or that the Company will be able to integrate the operations, products or personnel gained through any such acquisitions without a material adverse effect on the Company's business, financial condition and results of operations. Difficulty of Integrating Two Companies. In connection with the Company's recent acquisition of RAScom, Inc., the successful integration of the operations, personnel and product lines of the two companies is important to the future financial performance of the combined enterprise. The anticipated benefits of the acquisition may not be achieved unless, among other things, the operations of RAScom are successfully combined with those of the Company in a timely manner. The diversion of the attention of management, and any difficulties encountered in the transition process, could have an adverse impact on the revenues, financial condition and results of operation of the combined enterprise. Excel may not be able to successfully integrate RAScom and its services and products into the Company's operations. The inability of management to successfully integrate the operations of the companies could have a material adverse effect upon the business, financial condition and results of operations of the Company. Difficulty of Integrating RAScom Product Lines. As part of its product plans following the acquisition of RAScom, Excel expects to be integrating RAScom's remote access technology with Excel's programmable switching technology for the enhanced services and wireless and 20 infrastructure markets, as well as for small- and medium-sized Internet Service Providers. The integration by Excel of RAScom's product offerings can be costly, and result in unanticipated delays or difficulties with product integration, and require further development expenses and further expenditures for sales and marketing campaigns associated with advertising the new, complementary product offerings. There is no assurance that the RAScom research and development team can be successfully assimilated with Excel's engineering personnel, or that the RAScom engineering personnel will continue to remain at Excel following the acquistion. Excel has no assurance that its existing customers will purchase the new RAScom product lines, once integrated, or that Excel will be able to attract new customers with added the RAScom product capabilities. While management believes that RAScom's technology enhances Excel's existing product offerings and expands its addressable markets, delays or difficulties associated with this product integration or the loss of RAScom engineering personnel could have a material adverse effect on Excel's business and results of operations. Uncertainties Relating to Integration of Operations. The Company believes that the acquisition of RAScom will result in long-term strategic benefits. However, the realization of these benefits will depend on whether management can integrate the operations of the Company and RAScom in an efficient and effective manner. Among other things, the Company must integrate the respective companies' products, technologies, distribution channels and key personnel. Furthermore, the Company must coordinate the sales, marketing and research and development efforts of RAScom. The difficulties of integrating RAScom may be increased by the need to coordinate organizations with distinct cultures and widely dispersed operations. The effective integration of the various operations will depend on the ability of the Company to attract and retain key management, sales, marketing and research and development personnel. The integration of operations following the acquisition will require significant attention of management and thus may distract attention from other day-to-day operations of the Company. Need to Integrate and Retain Key Employees of RAScom. The successful integration of RAScom, Inc. is dependent on the retention and integration of the key management, sales, marketing, engineering and other technical employees of RAScom. Competition for qualified personnel in the industries in which the Company and RAScom compete is very intense, and competitors may use aggressive tactics to recruit key employees of the Company and RAScom during the integration phase following the acquisition which could result in the loss of key employees. The loss of these key personnel could have a material adverse effect on Excel's business, financial condition and results of operations. Risks Related to Sales to End-Users. The Company intends to increase the volume of sales to end-users over the next several periods. Although the Company's products have been distributed through indirect channels to end-users, the Company has limited experience in distributing directly to and directly supporting end-users. Sales to en-users are subject to a variety of 21 risks, including increased costs to promote and market the products; to install and integrate products and support the customer base; increased warranty obligations and a longer sales cycle. Sales to end-users may also involve significant acceptance, performance and other milestone criteria, which may impact the timing of the revenue recognition. The installation of a complete system involves the integration of the Company's product with various third-party equipment and applications. Difficulties or delays in integration may result in delays in market acceptance and sales, diversion of development and management resources, injury to the Company's reputation or increased service and warranty costs, any of which could have a material adverse affect on the Company's business, financial condition and results of operations. Sales to end-users may require the Company to provide additional third-party components and software applications. The inability to obtain sufficient supplies of these components and applications could result in delays or reductions in product shipments which could materially adversely affect the Company's business, financial condition and results of operations. In order to meet the needs of network providers, the Company may be required to further develop or enhance its existing product offerings or acquire additional products and technologies from third parties. Such new products or enhancements may require the Company to obtain additional technical certification in telecom networks. Delays in product development and certification could materially adversely affect the Company's business, financial condition and results of operations. Concentrated Product Family and Risk of New Product Introductions. The Company currently derives substantially all of its revenues from its family of open, programmable switching platforms and expects that this concentration will continue in the foreseeable future. As a result, any decrease in the overall level of sales of, or the prices for, open, programmable switching platforms due to product enhancements, introductions or announcements by the Company's competitors, a decline in the demand for open, programmable switches, product obsolescence, price competition, technological change or any other reason could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company intends to continue to invest in product and technology development, including increasing port capacity and performance, the development of additional related software applications and tools, the improvement of third-party application integration and the continued provision of updated product features and enhancements. The Company may experience difficulties that could delay or prevent the successful development, introduction or marketing of such new products and enhancements. It is not known whether the Company's new products and enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. Announcements of currently planned or other new product offerings by the Company or its competitors may cause customers to defer or cancel the purchase of existing Company products. The Company's inability to develop on a timely basis new products or enhancements to existing products, or the failure of such new products or enhancements to achieve market acceptance, could have a material adverse effect on the Company's business, financial condition and results of operations. The development of new, technologically advanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends. The introduction of new or enhanced products also requires the Company to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. It is not certain that the Company will successfully develop, introduce or manage the transition to new products. Furthermore, products such as those offered by the Company may contain undetected or unresolved errors when they are first introduced or as new versions are released. Despite extensive testing by the Company, errors may be found in new products or upgrades after commencement of commercial shipments, resulting in delays in or loss of market acceptance and sales, diversion of development resources, injury to the Company's reputation or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Management of Growth, Hiring of Additional Personnel and Dependence on Key Personnel. The Company has experienced growth in revenues and expansion of its operations which have placed significant demands on the Company's management, engineering staff and facilities. In May 1999, the Company completed an acquisition of an existing corporation. During 1998, the Company completed the acquisitions of two existing corporations and 22 established operations internationally. The Company continues to implement additional financial and management procedures that the Company believes will address increasing demands on resources. However, the Company believes that further improvements in management and operational controls are needed, and will continue to be needed, to manage any future growth. Continued growth will also require the Company to hire more engineering, selling and marketing and administrative personnel, expand customer support capabilities, expand the infrastructure of its international operations, expand management information systems and improve its inventory management practices. The Company has at times experienced, and continues to experience, difficulty in recruiting qualified personnel. Recruiting qualified personnel is an intensely competitive and time-consuming process. It is not certain whether the Company will be able to attract and retain the necessary personnel to accomplish its growth strategies or that it will not experience constraints that will adversely affect its ability to satisfy customer demand in a timely fashion or to support satisfactorily its customers and operations. If the Company's management is unable to manage growth effectively, the Company's business, financial condition and results of operations could be materially adversely affected. While the Company believes its current and planned facilities are adequate to meet its needs through the next 12 months, future growth may require the Company to obtain additional or alternative facilities. Due to the limited supply of suitable additional or alternative office and manufacturing space in the Cape Cod, Massachusetts area, there can be no assurance that such space can be leased or acquired without substantial required renovations. Relocation of any segment of the Company's operations may disrupt business and have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the local permitting and variance procedures for the renovation or construction of buildings in the Cape Cod area is more onerous than found in metropolitan areas. Accordingly, it is not certain that the Company will not be required in the future to devote significant resources to the permitting and renovation of additional facilities or in relocating some or all of the Company's facilities. The Company's success depends to a significant degree upon the continued contributions of its President, Chief Executive Officer and principal stockholder, Robert P. Madonna, and its key management, engineering, selling and marketing and manufacturing personnel, many of whom would be difficult to replace. The Company does not have employment contracts with its key personnel. The loss of the services of any key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly software engineers, could have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with International Sales. In the first quarter of 1999, direct sales to customers located outside of the United States accounted for approximately 30% of the Company's revenues. However, the Company sells a majority of its products to application developers, OEMs and systems integrators located within the United States which market products and services based on the Company's products worldwide. The Company intends to further expand its operations outside the United States and enter additional international markets, which will require significant management attention and financial resources. International sales are subject to a variety of risks, including difficulties in establishing and managing international distribution channels, in servicing and supporting products sold outside the United States and in translating products and related materials into foreign languages. International operations are also subject to difficulties in collecting accounts receivable, staffing and managing personnel and enforcing intellectual property rights. Other factors that can adversely affect international 23 operations include fluctuations in the value of foreign currencies and currency exchange rates, changes in import/export duties and quotas, introduction of tariff or non-tariff barriers and economic or political changes in international markets. Any inability to obtain foreign regulatory approvals on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. If the Company's international sales increase, its revenues may also be affected to a greater extent by seasonal fluctuations resulting from lower levels of sales which typically occur during the summer months in Europe and other parts of the world. It is not certain that these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, financial condition and results of operations. Risks Associated With Litigation. The Company is currently involved in litigation with Cisco Systems, Inc. ("Cisco") where the Company has alleged infringement of certain of its patents and Cisco has filed counterclaims alleging breach of a certain confidentiality agreement and infringement of certain of its patents. The litigation is in the early stages of discovery. There can be no assurance that this litigation will ultimately be resolved in favor of the Company or on terms that are favorable to the Company. The Company could incur substantial costs, product shipment delays or restrictions, and diversion of management resources in defending, pursuing and resolving these claims and counterclaims. Cisco has substantially greater financial resources to underwrite the cost of litigation and is in a better position to underwrite protracted litigation. The Company might also be subject to injunctive or other equitable relief, or might be required to pay substantial damages awards or enter into licensing or royalty arrangements to resolve these claims and counterclaims, or might be prevented from selling or delivering its products. Any of the foregoing could have a material adverse effect on the Company's business, results of operations and financial condition. Length of Sales Cycle. The time between the date of initial contact with a potential customer and large-scale commercialization of a new customer application or system based on the Company's products is often lengthy, typically ranging from 12 to 24 months or more, and is subject to delays over which the Company has little or no control, including customers' budgetary constraints, customers' internal acceptance reviews, the success and continued internal support of customers' own development efforts, and the possibility of cancellation of projects by customers. Although the Company attempts to develop its products with the goal of shortening the time to market of its customers' products, the timing of the commercialization of a new customer application or service based on the Company's products is primarily dependent on the success and timing of a customer's own internal development program. Delays can also be caused by late deliveries by other vendors, changes in implementation priorities and slower than anticipated growth in demand for the services that the Company's products support. A delay in, or cancellation of, the sale of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations and cause the Company's results of operations to vary significantly from quarter to quarter. Dependence on Proprietary Rights. The Company's success and its ability to compete are dependent, in part, upon its proprietary rights. The Company relies primarily on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions to establish and protect its proprietary rights. It is not known whether such measures will be adequate to protect the Company's proprietary rights. Further, the Company may be subject to additional risks as it enters into transactions in countries where intellectual property laws are not well developed or are difficult to enforce. Legal protections of the Company's proprietary rights may be ineffective in such countries. Litigation to defend and enforce the Company's intellectual property rights could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations, regardless of the final outcome of such litigation. Despite the Company's efforts to safeguard and maintain its proprietary rights both in the United States and abroad, it is not known whether the Company will be successful in doing so or that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of the Company's technology or to prevent an unauthorized third party from copying or otherwise obtaining and using the Company's products or technology. There also can be no guarantees that others will not independently develop similar technologies or duplicate any technology developed by the Company. Any such events could have a material adverse effect on the Company's business, financial condition and results of operations. 24 The Company has entered into agreements with a small number of its customers requiring the Company to deposit its source code and, on occasion, manufacturing blueprints, tooling diagrams and production specifications, in escrow with a third party. These escrow agreements typically provide that these customers have a non-exclusive, limited right to use such code and other materials in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to conduct business or if the Company defaults on its support obligations. The use of such agreements may increase the likelihood of misappropriation by third parties. As the number of entrants to the Company's markets increases and the functionality of the Company's products increases and overlaps with the products of other companies, the Company may become subject to claims of infringement or misappropriation of the intellectual property rights of others. In its distribution agreements, the Company agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In certain limited instances, the amount of such indemnities may be greater than the revenues the Company may have received from the customer. There can be no guarantee that third parties will not assert infringement or misappropriation claims against the Company in the future with respect to current or future products. Any claims or litigation, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company changed its name from Excel Inc. to Excel Switching Corporation in September 1997. Searches performed on the term Excel have revealed several registrations and numerous uses of that term, and terms substantially similar to it, alone and in combination with other terms and designs. Accordingly, there can be no guarantee that third parties will not assert trademark infringement claims relating to the name Excel in the future. Compliance with Regulations and Evolving Industry Standards. The market for the Company's products is characterized by the need to meet a significant number of communications regulations and standards, some of which are evolving as new technologies are deployed. In the United States, the Company's products must comply with various regulations including those promulgated by the Federal Communications Commission and standards established by Underwriters Laboratories and Bell Communications Research. Furthermore, there are regulations and standards imposed by various foreign countries where the Company's products are installed. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could delay the introduction of the Company's products. Moreover, the enactment by federal, state or foreign governments of new laws or regulations, changes in the interpretation of existing laws or regulations or a reversal of the trend toward deregulation in the telecommunications industry could materially adversely affect the Company's customers, and thereby materially adversely affect the Company's business, financial condition and results of operations. 25 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. Reference is also being made to the disclosure in Part II, Item 7A, entitled QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK of the Company's Annual report on Form 10K for the fiscal year ended December 31, 1998. The Company, in the normal course of business, is subject to the risks associated with fluctuations in interest rates and changes in foreign currency exchange rates. Interest and Market Risk. The Company maintains a portfolio of marketable, primarily fixed income, available-for-sale securities of various issuers, types and maturities. The Company has not used derivative financial instruments in its investment portfolio. The Company attempts to limits its exposure to interest rate and credit risk by placing its investments with high-quality financial institutions and has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidation. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates decline. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. The fair market value of investment securities held at March 31, 1999 was $125.7 million, including unrealized gains of approximately $51,000. The Company's investment portfolio has not changed significantly since December 31, 1999. The weighted average interest rate of the investment portfolio at December 31, 1998 and March 31, 1999 was approximately 5.1% and 4.9%, respectively. The Company's existing debt obligations are at fixed interest rates and therefore will not be affected by changes in market interest rates. Under the Company's line-of-credit arrangement with a bank, borrowings may bear interest at either the bank's base rate or the Eurodollar rate plus 1.75%. At March 31, 1998, no amounts were outstanding under this line. Any interest which may in the future become payable on the line-of-credit will be based upon variable interest rates and will therefore be affected by changes in market interest rates. Foreign Currency Risk. To date, the Company's exposure to foreign currency fluctuations has been minimal. All sales transactions are denominated in US dollars. Letters of credit are utilized when warranted. The Company funds its international operations from US dollar bank accounts on an as-needed basis and, accordingly, does not maintain a significant amount of funds in foreign currencies. Presently, the Company does not hedge foreign currency exposure for its non-US dollar denominated operating expenses as such amounts have not been material in relation to the Company's domestic operating expenses. 26 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings In 1998, the Company filed suit in the U.S. District Court for the District of Massachusetts alleging certain of Summa Four, Inc.'s ("Summa Four") telecommunication equipment infringes three patents owned by the Company and seeking a finding of infringement of each of the three patents, an injunction against further infringement, and damages. Summa Four filed a counterclaim asserting the breach of a certain confidentiality agreement, and seeking unspecified damages. The Company filed an answer denying the counterclaim for breach of the confidentiality agreement and raising several defenses to that counterclaim. Summa Four served additional counterclaims, including one alleging that certain of the Company's telecommunication equipment infringes a Summa Four patent and seeking an injunction against further infringement and unspecified damages. The additional counterclaims further allege fraud, breach of duty of good faith and fair dealing, intentional misrepresentation and/or inducement, and unfair competition, and seek unspecified damages. The Company filed an answer denying the additional counterclaims and raising several defenses to the additional counterclaims. On March 20, 1999, the Court substituted Cisco Systems, Inc. ("Cisco") for Summa Four as defendant and counterclaimant, as a result of Cisco's acquisition of Summa Four. The case remains in the early stages of litigation and although the Company intends vigorously to pursue its claims against Cisco and defend against Cisco's counterclaims, there can be no assurance that this litigation will ultimately be resolved on terms that are favorable to the Company. ITEM 2. Changes in Securities and Use of Proceeds (d) Use of Proceeds of Initial Public Offering - On November 4, 1997 the Securities and Exchange Commission declared effective the Company's Registration Statement on Form S-1, Commission file number 333-35791, relating to the initial public offering of the Company's Common Stock. The offering commenced on November 4, 1997 and all shares covered by the Registration Statement were sold. The following sets forth certain information regarding the Company's application of the net proceeds therefrom through March 31, 1999. Remaining offering proceeds, December 31, 1998 $31,570,000 Less: Purchases of property and equipment 3,128,000 Payments on long-term obligations 46,000 Payments related to acquisitions -- Payments related to payroll 10,413,000 Interest payments on debt obligations 210,000 Payments related to vendor purchases or taxes 17,773,000 ----------- Remaining offering proceeds, March 31, 1999 $ -- ===========
The Company has invested the net proceeds from the initial public offering in November 1997 in investment grade, interest-bearing securities. None of the net proceeds from the IPO were used to pay, directly or indirectly, directors, officers, persons owning ten percent or more of the Company's equity securities, or affiliates of the Company, with the exception of compensation related payments to officers made in the normal course of business. 27 ITEM 3. Defaults Upon Senior Securities None ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.8 - Vendor Program Agreement dated March 1999 between the Company and NationsCredit Commercial Corporation dated March 30, 1999. Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K None 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Excel Switching Corporation (Registrant) Dated: May 18, 1999 /s/ Robert P. Madonna --------------------- Robert P. Madonna President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Dated: May 18, 1999 /s/ Stephen S. Galliker ----------------------- Stephen S. Galliker Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 29 EXHIBIT INDEX
- --------------------- ------------------------------------------------------------------------------------ Exhibit No. Description - --------------------- ------------------------------------------------------------------------------------ 10.8 Vendor Program Agreement dated March 1999 between the Company and NationsCredit Commercial Corporation dated March 30, 1999. - --------------------- ------------------------------------------------------------------------------------ 27.0 Financial Data Schedule (EDGAR) - --------------------- ------------------------------------------------------------------------------------
EX-10.8 2 EXHIBIT 10.8 Exhibit 10.8 VENDOR PROGRAM AGREEMENT THIS VENDOR PROGRAM AGREEMENT is dated as of March 30, 1999, between NATIONSCREDIT COMMERCIAL CORPORATION, a Delaware corporation with a place of business at 1355 Windward Concourse, Alpharetta, Georgia 30005 ("NCC"), and EXCEL SWITCHING CORPORATION, a Massachusetts corporation with its principal place of business at 255 Independence Drive, Hyannis, Massachusetts 03601 ("CLIENT"). R E C I T A L S WHEREAS, Client desires a financing program to support the sale of its products ("EQUIPMENT"), and Client and NCC wish to establish a financing program to enable Customers of Client to finance the purchase or lease of such Equipment ("PROGRAM"), on the terms and conditions set forth herein; NOW, THEREFORE, for valuable consideration hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. For purposes of this Agreement: "AGREEMENT" means this Vendor Program Agreement, as amended, modified, renewed or extended from time to time. "APPLICATION" means a credit application completed by a prospective Customer, which shall include the prospective Customer's financial statements for the previous three years and interim financial statements for the current fiscal year, bank references and other credit information concerning a Customer, as well as any other documents or information required by NCC to initiate its consideration of a proposed Transaction. "BUSINESS DAY" means a day other than Saturday or Sunday and any legal holidays observed in the States of Georgia, Texas or Massachusetts. "CONTRACT" means any Lease, conditional sales agreement, loan agreement, or other instrument or agreement evidencing or securing a Transaction. "CUSTOMER" means a customer of Client who is an obligor under a Transaction and/or a guarantor of such obligations. "DEFAULT BY CLIENT" means a material breach by Client of any of its representations, warranties or obligations under this Agreement or under any other material agreement between Client and NCC or NCC's affiliates. "EQUIPMENT" has the meaning set forth in the recitals of this Agreement. "EVENT OF BANKRUPTCY" means, with respect to any person or entity, its insolvency, inability to pay debts as they mature, failure to operate as a going concern, a voluntary or involuntary filing under Title 11 of the United States Code or any successor or similar federal or state statute or any applicable foreign law, assignment for the benefit of creditors, appointment of a receiver, or death or dissolution. "EVENT OF CANCELLATION" means, with respect to a Transaction, (a) a Material Adverse Change in the financial or other condition of Client since the date of this Agreement or of the Customer since the date of the related Application, (b) any Default by Client, (c) notification by a Customer either to Client or NCC of its intent to cancel all or any part of its Transaction or to reject or refuse to accept any Equipment, (d) the inaccuracy of any credit information supplied to NCC with respect to the Customer or Transaction, or (e) any failure by Client to fulfill any of the obligations it may have to NCC with respect to such Transaction. "FINAL DOCUMENT PACKAGE" means such documents as NCC deems necessary to the complete the Transaction and to pay the Funded Amount to Client. "FINANCING TRANSACTION" means a Transaction which constitutes a loan, conditional sales contract, a lease intended as security (i.e., a contract between NCC and a Customer for a specified term where legal title to the Equipment passes to the Customer or which contains a purchase option for a bargain or nominal amount) or other similar forms of financing whereby NCC finances the Purchase Price and the Customer grants a security interest in the related Equipment to NCC. "FISCAL YEAR" means calendar year ending on or after the date of this Agreement. "FUNDED AMOUNT" means the Purchase Price of the applicable Equipment, net of any down payment or deposit paid to Client by the Customer. "LEASE" means a contract between NCC and a Customer for a specified term during which NCC is the owner of the Equipment and the Customer is allowed use of the Equipment subject to the terms of the contract. "MATERIAL ADVERSE CHANGE" means, as to Client or a Customer, (a) a material adverse change in its financial condition, properties, assets, business, operations or prospects, (b) a material change in its corporate structure, ownership, management or control, or (c) the occurrence of an Event of Bankruptcy. "NET BOOK VALUE" means the value of a Transaction, as reflected on NCC's books and records, calculated on the basis of: (a) all accrued and unpaid sums due under the Transaction; plus (b) all future payments due during the remaining term of the Transaction, with each such payment discounted to its present value at the rate applicable to the Transaction (or such other special rate as may be applicable thereto) as of the date of payment due NCC under this Agreement; plus (c) an amount equal to the residual value of the Equipment assumed by NCC, discounted to its present value at the rate applicable to the Transaction as of the date of payment due NCC under this Agreement; plus (d) all unpaid or accrued taxes, insurance if any, collection costs and other sums, including court costs and reasonable attorney's fees, due NCC under the Transaction. "NET LOSS" has the meaning set forth in Section 8(b). "NET SALE PROCEEDS" means gross proceeds realized by NCC from the sale of any Equipment, net of costs of repossession, storage and sale of Equipment, Taxes, court costs and reasonable attorneys' fees, and other expenses incurred or payable by NCC in connection with realization on the Equipment or enforcement of the related Contract. If Equipment is sold on credit, gross sale proceeds will include any cash down payment, any trade-in allowed by NCC and the portion of the sales price financed by NCC. "OFF-LEASE" has the meaning set forth in Section 10(a). "PROGRAM" has the meaning set forth in the recitals of this Agreement. "PURCHASE PRICE" means the invoiced cost of the Equipment, plus any applicable delivery and installation charges and sales taxes, paid to Client by NCC with respect thereto, the cost of which shall not be greater than the published list price of equivalent equipment. "REMARKET" means the re-lease or sale of Off-Lease Equipment by Client pursuant to Section 10. "REPRESENTATIVE" means a representative of Client. "TAXES" has the meaning set forth in Section 10(f). "TERM" has the meaning set forth in Section 13. "TRANSACTION" means a lease or financing of Equipment for a Customer by NCC in the form of a Lease, Financing Transaction or other financing product. -2- "ULTIMATE NET LOSS LIMIT" has the meaning set forth in Section 8(a). 2. ORIGINATING TRANSACTIONS. Subject to the terms hereof, NCC may from time to time develop and make available to Customers certain financing products for use under the Program. Client shall (a) promote NCC as its financing company of choice with respect to the financing or leasing of Equipment, and (b) encourage each of its Representatives to make financing options through NCC known to Client's customers and to utilize such financing options, as appropriate, in the conduct of his or her sales efforts pursuant to the terms and conditions of this Agreement. NCC shall have the right of first refusal on any transaction originated by Client involving the financing or leasing of Equipment during the Term of this Agreement; provided, however, that Client may find another financing source for a proposed transaction, if Client can find better terms and pricing than those approved by NCC for the transaction. 3. CONSIDERATION OF TRANSACTIONS. (a) NCC and/or Client will cause each prospective Customer to complete and deliver to NCC an Application. NCC will review such Application upon its receipt and will notify Client of NCC's credit decision. All credit decisions will be at the sole discretion of NCC. NCC will use its best efforts to either approve or reject any proposed Transaction of $500,000 or less within two Business Days of its receipt of a completed Application, and will use its best efforts to either approve or reject any proposed Transaction between $500,000 and $2,000,000 within five Business Days of receipt of a completed Application. (b) Upon the approval of an Application, NCC shall cause a Final Document Package to be delivered to a Customer. (c) NCC shall not be obligated to enter into a Transaction or to purchase the related Equipment, if either (i) NCC has not received the Final Document Package within 90 days after NCC sent such package to the Customer, or (ii) prior to payment by NCC of the Funded Amount for the Transaction, NCC determines, in its good faith judgment after consultation with Client, that an Event of Cancellation has occurred. Upon the passage of such 90 day period or NCC's determination of an Event of Cancellation, NCC shall transfer to Client any interest which NCC may have in such Transaction or the related Equipment. Thereafter, NCC shall have no further liability to the Customer or Client in connection with such Transaction. 4. ACQUISITION OF EQUIPMENT. Subject to Section 3, and provided Client has fulfilled all of its obligations relating to a Transaction, NCC will pay Client the Funded Amount with respect to such Transaction by wire transfer within two Business Days after NCC's receipt of a complete Final Document Package therefor. 5. PURCHASE ORDER AND WARRANTY. (a) As to each Lease, Client (i) consents to the assignment by the applicable Customer to NCC of any purchase order for, and all warranty rights in connection with, the Equipment related to such Transaction; (ii) agrees that NCC will not be liable for any obligations of the Customer under any Transaction documents; and (iii) agrees, upon such acceptance, to deliver to NCC an invoice or bill of sale conveying to NCC good title to such Equipment, free and clear of all liens and encumbrances. (b) As to each Financing Transaction, Client (i) acknowledges that it has transferred to the applicable Customer all warranty rights in connection with the Equipment; (ii) agrees that NCC will not be liable for any obligations of the Customer under any Transaction documents; and (iii) agrees, upon the acceptance of such Equipment by the applicable Customer, to deliver to NCC a copy of an invoice or bill of sale evidencing that good title to such Equipment, free and clear of all liens and encumbrances, has passed to the Customer. (c) NCC shall not bear any risk of loss to any Equipment until the date of acceptance by the Customer and NCC's payment of the Funded Amount relating thereto. -3- 6. ADMINISTRATION. (a) NCC will provide general administrative and operations services in connection with the Program, including but not limited to sales support, operations support, credit investigation, and billing and collections. NCC will work with Client to originate, structure and negotiate new Transactions and otherwise support the Program and Client's sales efforts. NCC will monitor the quality of customer service and provide for the continuous improvement of such areas as necessary. Except as otherwise provided in this Agreement, NCC will perform all usual and customary duties in the operation of a business engaged in the provision of financing services, including (i) maintaining and operating systems which track the status of each Transaction; (ii) billing Customers and receiving and applying funds; (iii) preparing, executing and filing documents, including leases, notes, security agreements, guaranties and UCC financing statements; and (iv) collecting and paying all applicable property, sales, use or similar taxes with respect to Leases and, as appropriate, preparing and filing tax returns in connection therewith. NationsCredit will provide Client with monthly reports showing the agings of rentals on Leases and payments on Financing Transactions, as well as such other information as Client may reasonably request from time to time. (b) Client irrevocably appoints NCC, with power of substitution, as Client's attorney-in-fact to act in Client's name and stead with respect to the Transactions, and to endorse or sign Client's name on all checks and collections relating to the Transactions, as NCC deems necessary or appropriate to protect NCC's interest in the Equipment, the Transactions and any security therefor. NCC will use its best efforts to deliver copies to Client of any items endorsed with Client's name pursuant to this Section, other than routine payments on Transactions. (c) NCC and Client will each appoint a Program manager to serve as the primary contact between Client and NCC under the Program. The Program managers will be charged with the management of the relationship between Client and NCC under the Program, including compliance by the parties with this Agreement. The Program managers will (i) facilitate the day to day interactions between the parties; (ii) assess and resolve disputes between the parties arising from the day to day operations of the Program; (iii) review from time to time the documents required to be used under the Program; and (iv) perform such other functions required of each from time to time pursuant to this Agreement. (d) At Client's request, NCC will sponsor training programs for Client sales representatives and manufacturer representatives. Such programs would include training in the proper documentation of Transactions, techniques in the use of leases and other financial products as sales tools, and such other matters as the parties may mutually agree. Client will use its best efforts to encourage its Representatives to attend such training programs. Each party shall pay the transportation, facilities and accommodation costs for the training programs for its own employees or representatives. (e) Client will invite the appropriate managers of NCC to participate in selected sales and marketing meetings, product announcements and such other events as the Program managers deem appropriate. All of the foregoing will be subject to compliance with all applicable laws, including the securities laws of the United States and any other applicable jurisdiction. 7. REPURCHASE OF CONTRACTS. (a) If NCC or Client reasonably determines that: (i) any Equipment has been surrendered, damaged beyond repair, destroyed or abandoned by a Customer, or repossessed; (ii) an Event of Bankruptcy has occurred with respect to a Customer; or (iii) any Customer has defaulted in the payment of its obligations and such default has continued uncured for 61 days or more; then Client may, and shall upon demand by NCC, repurchase the applicable Contract and related Equipment by paying the Net Book Value therefor. Such repurchase shall occur within 10 Business Days after NCC makes demand therefor; provided, however, that in the case of clause (iii), Client may cure all payment and other defaults -4- under a Contract in lieu of repurchase; and provided further, that such cure may only be effected up to four times for any given Contract. The obligation of Client to repurchase Contracts and Equipment pursuant to this Section shall be limited as set forth in Section 8. (b) If Client fails to repurchase any Contract and Equipment as required herein, NCC may (but shall not be required to) liquidate same, including repossession and disposition of the Equipment, and Client shall be liable for any resulting deficiencies and all reasonable expenses incurred in connection therewith. Any Equipment may be sold by NCC for cash or on credit, and the Net Sale Proceeds received by NCC shall be deducted from Client's deficiency obligation. (c) Concurrently with the payment by Client of the Net Book Value for any Contract and Equipment, NCC shall assign same to Client, without recourse, representation or warranty of any kind, except that NCC shall warrant that it has title free from liens and encumbrances created by or through NCC. All financing statements relating to the Contract and/or Equipment shall be assigned to Client, and NCC shall deliver to Client such original copies of the Contract and all related Transaction documents held by NCC. 8. ULTIMATE NET LOSS LIMIT. (a) The aggregate Net Loss incurred by Client pursuant to Section 7 with respect to Contracts funded by NCC in any Fiscal Year shall not exceed an amount ("ULTIMATE NET LOSS LIMIT"), determined as of the last day of such year, equal to (i) the aggregate Net Book Value of all Contracts having a risk rating of 8 or higher (as determined by NCC's credit department using its customary criteria) funded by NCC during such year, plus (ii) the greater of (A) $2,000,000 or (B) 20% of the aggregate Net Book Value of all other Contracts funded by NCC during such year. Separate calculations of Net Loss and Ultimate Net Loss Limit shall be made for each pool of Contracts funded by NCC during each Fiscal Year. (b) As used herein, "NET LOSS" means, with respect to any Contract, the sum of (i) all payments made by Client to NCC to repurchase such Contract, plus (ii) any cure payments made by Client to NCC with respect to such Contract, minus (iii) the total amount realized by Client (net of reasonable expenses) upon the liquidation or disposition of such Contract and the related Equipment, including recoveries from any Customer and from the sale, lease or other disposition of the Equipment. In computing Net Loss, amounts paid by Client with respect to a Contract may only be included if Client shall have Remarketed the related Equipment within 120 days following the date on which NCC requested repurchase of the Contract. (c) Client shall keep records with respect to each Contract that it repurchases from NCC, showing amounts paid by Client to NCC with respect to such Contract, amounts realized by it from the liquidation of Equipment, amounts otherwise recovered and costs of recovery. Upon request, Client will furnish a written report to NCC, within 10 days after the request, showing such amounts for any or all Contracts. NCC shall be entitled, on reasonable notice and at reasonable times, to audit such records of Client. (d) Client may not, without the prior written consent of NCC (which shall not be unreasonably withheld), sell any Equipment for a price less than the Net Book Value of such Contract, or compromise or settle the amount owing on any repurchased Contract for an amount less than the Net Book Value thereof. If Client incurs 100% of the Ultimate Net Loss Limit with respect to any Fiscal Year, NCC may apply any further Net Losses for such year to the Ultimate Net Loss Limits for other Fiscal Year(s), in such order and timing as NCC deems appropriate. 9. RETURN OF EQUIPMENT; CAPITAL LEASES; INDEMNIFICATION. (a) With respect to each Contract under which the Equipment is located outside the United States, Client will ensure the return of such Equipment to a U.S. location specified by NCC upon expiration or other termination of the Contract, whether due to default under a Transaction Document, early termination, failure to purchase any Equipment under the Contract, expiration of the lease term or otherwise. If any such Equipment is not so returned, Client shall, at its option, (i) deliver to NCC replacement equipment of comparable value, technology and utility, or (ii) repurchase the Equipment and related Contract from NCC for the Net Book Value of the Contract. -5- (b) Client will use its best efforts to ensure that all Leases funded hereunder may be treated by NCC as capital leases for tax and other purposes. (c) If (i) Client breaches any representation, warranty or covenant or fails to perform its obligations in this Agreement, or any related instrument or agreement, (ii) any Customer returns or fails to accept any Equipment for any reason, (iii) any Customer fails to make its first rental payment following NCC's funding of a Contract, or (iv) any Customer fails to make payments under any Contract alleging action or inaction (including breach of any agreement or warranty) on the part of Client, then NCC may require that Client repurchase the affected Contract(s) and NCC's rights respecting the applicable Equipment for the Net Book Value thereof. Such repurchase shall occur within 10 Business Days after NCC makes demand therefor. (d) Client agrees to indemnify and hold harmless NCC from and against any loss, cost, claim, action, damage, injury or expense, including reasonable attorneys' fees, that NCC may incur in connection with or by reason of Client's failure to observe or perform any provision of this Agreement, or any related instrument or agreement. Client agrees to pay all costs and expenses (including reasonable attorneys' fees) incurred by NCC in the enforcement of this Agreement. (e) Client's repurchase, remarketing, indemnification and other obligations under this Agreement shall not be avoided or limited for any reason, including without limitation usury or any other defenses to payment claimed or alleged by any Customer, release of any security for a Transaction by NCC, or waivers, extensions or other accommodations made by NCC with respect to Customer's obligations under any Contract or Transaction. NCC shall not be required to attempt to collect amounts owing under any Contract, to commence legal action against any Customer, to realize value from any Equipment, or to enforce any rights against Client, as a precondition to demanding that Client repurchase any Contract or Equipment or otherwise fulfill its obligations hereunder. To the fullest extent permitted by law, Client waives any defense or offset it may now have or hereafter acquire to its repurchase obligations hereunder, including any defense under suretyship laws or principles. Client waives presentment for payment, acceptance, protest and notice of protest and all other notices to which it might be entitled by law, except as provided in this Agreement. NCC's rights hereunder are cumulative. (f) Client's obligations under this Section are not subject to the limitations of Section 8 and will not be included in calculating Net Loss. 10. REMARKETING. (a) Client will, at the request of NCC, assist NCC in Remarketing any Equipment returned to or repossessed by NCC, whether due to expiration of a Lease, default under a Contract, early or scheduled termination of a Lease, voluntary return of Equipment, or otherwise (such Equipment being "OFF-LEASE"). Remarketing shall be performed as provided below. Client shall not discriminate against Equipment being Remarketed hereunder in favor of any other used equipment owned, managed, sold or remarketed by Client. (b) Client will diligently perform the following Remarketing services with respect to each item of Equipment (including any Equipment covered by a Contract as a result of previous Remarketing): (i) Communicate directly with the Customer to solicit and/or present renewal and purchase options for the Equipment at least 90 days prior to scheduled expiration of the Contract; (ii) Provide telephonic and written feedback to NCC regarding the status of Remarketing negotiations with a Customer, including the Customer's intentions, counterproposals, and any new equipment or upgrade requests; and (iii) At least 75 days in advance, use reasonable efforts to inspect any Equipment that is scheduled to become Off-Lease and make recommendations to NCC as to any refurbishment, upgrades, performance improvements and engineering changes (including projected costs and estimated fair market value upon completion) appropriate for Remarketing of the Equipment. (c) Upon request by NCC, Client will use reasonable efforts to perform the following Remarketing services for any Equipment that is or is becoming Off-Lease: -6- (i) Peaceably take possession of Equipment as it becomes Off-Lease, transport it to storage facilities, store the Equipment and insure the Equipment against all risks of casualty, theft and destruction; (ii) With NCC's prior written approval, repair and refurbish the Equipment to return it to a marketable condition, cause the Equipment to perform and be warranted up to the warranty that Client then makes available for similar models of used equipment, and provide all engineering changes appropriate for equipment of the same model; (iii) Provide or obtain a manufacturer's written certification that the Equipment is qualified for inclusion under the manufacturer's standard maintenance policy for any new lessee or owner, and certify the Equipment to any applicable statutory or regulatory standard or specification; (iv) Seek new lessees or purchasers; and (v) Relicense all software used with the Equipment to the new lessee or purchaser. (d) Client will provide Remarketing reports to NCC, within 10 days after the end of each month, detailing as of the end of the prior month (i) any Equipment becoming Off-Lease within the next 90 days, and any negotiated extension, renewal or disposition thereof, (ii) all Equipment disposed of or re-leased during such month, showing the terms of such Remarketing, (iii) a description of all Off-Lease Equipment, including model and serial number, (iv) prices, if any, obtained in the marketing or remarketing of similar equipment by Client, (v) prices, if any, obtained at scrap or salvage for similar equipment by Client, and (vi) such other information as NCC may reasonably request. (e) In establishing rental or sales rates for the Remarketing of any Equipment, Client shall apply rates that, in its best commercial judgment, are the most favorable rates obtainable for equipment of such types. Client shall not offer credits or discounts without NCC's prior approval. Client will promptly identify to NCC any prospective lessees or purchasers of any Equipment, and will promptly transmit any proposed lease, renewal, extension or sales contract relating to Equipment and any related materials. Client shall use its best efforts to provide NCC with such credit information as NCC may request with respect to any prospective lessee or purchaser, but it is understood that such information is provided without warranty by Client as to accuracy or completeness. NCC may approve the Customer, price, terms and conditions of any Remarketing transaction in NCC's sole discretion, and Client will not consummate any transaction unless it is approved. If NCC approves of a transaction, it will notify Client in writing of the approval. NCC's failure to notify Client of approval within five Business Days after receipt of complete credit and other information will constitute disapproval. NCC will, concurrently, use its reasonable efforts to remarket any Off-Lease Equipment. (f) Upon the Remarketing of any Equipment, Client will promptly pay all sales, use, property, excise, ad valorem or other taxes payable to any governmental body in connection with the Remarketing (collectively, "TAXES") from any cash proceeds derived in the Remarketing, and will deliver the remaining cash proceeds to NCC. Upon Remarketing in a cash sale, Client shall deliver to NCC the executed sales contract and all other documents evidencing the sale. Upon Remarketing through a re-lease, extension, renewal or installment sale, Client will promptly deliver to NCC: (i) The executed lease, installment sales agreement, or extension or renewal agreement, together with all related instruments and agreements, in form and substance satisfactory to NCC, and an assignment thereof signed by Client in favor of NCC; (ii) A notice of assignment addressed to the lessee or purchaser, executed by Client, in a form acceptable to NCC; (iii) Such UCC and lien filings, title information and evidence of insurance as NCC may require; (iv) An installation certificate showing the Equipment has been installed, is ready for use and has been unqualifiedly accepted by the lessee, purchaser and/or user; and -7- (v) Such other instruments, agreements and information as NCC may reasonably request. (g) NCC will promptly reimburse Client for all reasonable out-of-pocket expenditures made by Client for transportation, storage, refurbishment, upgrade, improvement, reengineering, remarketing and sale of any Off-Lease Equipment returned by a lessee at the scheduled expiration of a Lease (and not as a result of early termination, default or other cause), to the extent such expenditures were approved in writing, in advance, by NCC with respect to the Equipment. Upon Client's successful Remarketing of any other Off-Lease Equipment, and payment of all Taxes relating thereto, Client shall be reimbursed from the remaining Remarketing proceeds received upon the sale, or from the initial rental payments under any lease or extension, for any such expenditures made by Client and approved in writing, in advance, by NCC with respect to such Equipment. For purposes of this Section, Client's expenditures will be calculated at Client's actual cost, not its customary retail price, for the applicable services or parts. In addition, once NCC has received the Net Book Value of the applicable Contract, NCC shall share with Client 35% of all additional amounts realized from Client's Remarketing of the Equipment (whether such Equipment was returned upon scheduled expiration of a Lease, as a result of early termination or default, or otherwise), as and when received by NCC. 11. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CLIENT. Client hereby represents, warrants and covenants to NCC, as of the date hereof, the date of each Application, the date of payment by NCC of any Funded Amount, and throughout the term of any Transaction, that: (a) Client is a duly organized and validly existing corporation, and has full power to enter into this Agreement and to carry out the transactions contemplated hereby; the execution and delivery of this Agreement and the performance by Client of the transactions contemplated hereby have been duly authorized by all necessary corporate action; and this Agreement constitutes a legal, valid and binding obligation of Client, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency or similar laws affecting the rights and remedies of creditors generally and the availability of equitable remedies; (b) Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default of any statute, rule, or decree of any court, administrative agency or governmental body to which Client is or may be subject, or any material agreement by which Client or any of its assets is bound; (c) All documents relating to a Transaction to which Client is a party or by which it is bound will be genuine, legal, valid, and binding obligations of Client enforceable in accordance with their terms, except as may be limited by bankruptcy, insolvency or similar laws affecting the rights and remedies of creditors generally and the availability of equitable remedies; (d) To the best of Client's knowledge, the signature of the Customer is genuine on its Transaction documents, and the individual signing on behalf of the Customer holds the office set forth below his name; (e) Client has not received nor will it receive any rent or other monies from any Customer in respect of any Transaction (other than any required advance rent or down payments disclosed in the Application and Final Document Package), and Client will immediately remit any advance rent or other funds owed to NCC with respect to any Transaction; (f) Client will deliver to NCC good title to the Equipment governed by any Transaction which constitutes a Lease, free and clear of all liens, claims, security interests and encumbrances (other than the rights of the applicable Customer to use the Equipment pursuant to the terms of the applicable Transaction), on and as of the date of the Customer's acceptance of the Equipment; (g) The Equipment covered by any Contract funded by NationsCredit has been delivered to and accepted by the named Customer, and is in good working order, condition and repair, conforming to specifications; the Equipment satisfies all federal, state, local and applicable foreign governmental standards for its use, existence and operations; Client will service and maintain the Equipment in compliance with any service or maintenance contracts it has with the Customer; and Client will honor any agreements made or warranties given by Client to any Customer in connection with any Transaction; -8- (h) Client has disclosed to NCC all credit information known to Client that could be reasonably relevant to a credit determination concerning a Customer or Transaction; and Client has not participated in, nor has knowledge of, any fraudulent act in connection with any Transaction or any Customer; (i) Client shall pay all applicable sales, use or property taxes which may apply to the Equipment assessed or imposed on or prior to the time NCC or the applicable Customer acquires the Equipment, and, upon NCC's request, Client will use its best efforts to provide NCC with proof of such payment as promptly as possible; (j) The Customer under each Contract is a "resident" of the United States for all taxing purposes; NCC is not required to be licensed or to obtain any licenses or governmental approvals (whether U.S. or foreign) for any Contract relating to Equipment located outside the United States; no taxes, withholdings, imposts, duties, assessments or similar items are payable by NCC in connection with any such Contract or Equipment; and all rentals and other amounts payable under the Contract are denominated and payable in U.S. dollars; (k) For each Contract relating to Equipment located outside the United States, Client or Customer has paid (or when due will promptly pay) all sales, use, property, installation or other taxes, duties, withholdings, assessments, licenses, tolls, inspection fees or other fees, bonds, permits, certificates or taxes which were (or may be) required to be paid or obtained, as the case may be, in connection with (i) Customer's acquisition of the Equipment; (ii) the execution or delivery of the Contract; (iii) the acquisition of the Equipment by NCC; and (iv) the Contract and Equipment; (l) Client will deliver to NCC, within 120 days after the end of Client's fiscal year, its annual audited financial statements or annual report for such fiscal year, and within 60 days after the end of each fiscal quarter, Client's unaudited quarterly financial statements, in form and substance satisfactory to NCC, and certified by an officer of Client in a manner acceptable to NCC; and the financial statements of Client delivered to NCC from time to time fairly present the financial position of Client as of the dates thereof and the results of operations of Client for the periods covered thereby, all in conformity with generally accepted accounting principles applied on a consistent basis; and (m) No Material Adverse Change has occurred with respect to Client since the date of this Agreement; and Client will promptly notify NCC immediately upon becoming aware that any such Material Adverse Change could occur or has occurred. 12. REPRESENTATIONS AND WARRANTIES OF NCC. NCC hereby represents, warrants and covenants to Client, as of the date hereof, that: (a) NCC is a duly organized and validly existing corporation, and has full power to enter into this Agreement and to carry out the transactions contemplated hereby; the execution and delivery of this Agreement and the performance by NCC of the transactions contemplated hereby have been duly authorized by all necessary corporate action; and this Agreement constitutes a legal, valid and binding obligation of NCC, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency or similar laws affecting the rights and remedies of creditors generally and the availability of equitable remedies; and (b) Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default of any statute, rule or decree of any court, administrative agency or governmental body to which NCC is or may be subject, or any material agreement by which Client or any of its assets is bound. 13. TERM AND TERMINATION. This Agreement will be effective upon execution by NCC and Client and will continue from such effective date for a period of two years ("TERM"). Upon expiration of the Term, this Agreement will automatically renew and the Term will extend for successive terms of one year, unless either party has theretofore notified the other party that this Agreement shall terminate at the end of its current Term. This Agreement may also be terminated (a) by NCC upon 90 days prior written notice to Client if NCC does not receive annual credit approval from its senior -9- management for the Program, or if an Event of Cancellation occurs that is applicable to all Transactions, or (b) by Client upon 90 days prior written notice to NCC if Client's Board of Directors hereafter disapproves the Program. Termination of this Agreement shall not affect Client's repurchase, remarketing, indemnification and other obligations relating to Transactions funded or committed by NCC prior to such termination, which obligations shall continue until all such Transactions are paid in full and NCC has disposed of all related Equipment. 14. ASSIGNMENT OF RIGHTS. The rights and obligations of NCC and Client under this Agreement may not be assigned without the prior written consent of the other party; provided, however, that NCC may, without prior written consent, assign any of its rights hereunder or under any Transaction to an affiliate (but such assignment shall not relieve NCC of its obligations hereunder), and Client may, without prior written consent, assign any of its rights to payment hereunder to any party. NCC may, in its sole discretion, securitize or syndicate its rights under any Transaction. 15. Y2K COMPLIANCE. Client represents, warrants and covenants that it (a) has initiated a review and assessment of all areas within its and its affiliates' business and operations (including those affected by suppliers and vendors) that could be adversely affected by the "Year 2000 Problem" (i.e., the risk that computer applications used by it or any of its affiliates (or its suppliers and vendors) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (b) has developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, (c) has, to date, implemented that plan in accordance with that timetable, (d) reasonably believes that all computer applications (including those of its suppliers and vendors) that are material to its or any of its affiliates' business and operations will on a timely basis be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a material adverse effect on it, and (e) will promptly notify NCC in the event it discovers or determines that any computer application (including those of its suppliers and vendors) that is material to its or any of its affiliates' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a material adverse effect on Client. 16. MISCELLANEOUS. (a) Client will have no right nor will it attempt to accept collections, repossess or consent to the return of any Equipment involved in a Transaction funded by NCC, unless Client obtains the prior written consent of NCC, nor will Client otherwise modify the terms of any such Transaction in any way whatsoever. (b) Notices to Client or NCC under this Agreement will be deemed to have been given when sent by recognized overnight delivery service or by certified mail, return receipt requested, to the other party at the address first stated above or such other address as such party may have provided by notice. Notices will be effective one Business Day after deposit with an overnight courier or five Business Days after transmittal by certified mail. (c) This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof, and supersedes all prior understandings or agreements of the parties relating thereto. The terms of this Agreement, or any related instrument or agreement, may not be modified orally, but only by a writing duly executed by both parties. If any provision of this Agreement is held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision will be of no force and effect, but the illegality or unenforceability of such provision will not impair the enforceability of any other provision of this Agreement. (d) The failure of any party at any time to require performance of any provision hereof will not affect the right to require full performance thereof at any time thereafter, and the waiver by either party of a breach of any provision will not constitute a waiver of any subsequent breach or nullify the effectiveness of such provision. (e) This Agreement may be executed in one or more counterparts, all of which together will constitute one and the same instrument. If there is any conflict between this Agreement and any ancillary agreements with respect to any Transaction or the related Equipment, then as between NCC and Client, the terms and conditions of this Agreement will control. -10- (f) This Agreement and any amendments hereto will be binding on and inure to the benefit of the parties hereto, and their respective permitted successors and assigns. This Agreement will not benefit or be enforceable by any other person or entity, including any Customer. (g) This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The parties agree that the state and federal courts located in New York, New York shall have jurisdiction to hear and determine any dispute pertaining to this Agreement and the matters contemplated hereby, and the parties expressly submit and consent to such jurisdiction. TO THE MAXIMUM EXTENT PERMITTED BY THE LAWS OF ANY FORUM STATE, CLIENT AND NCC EACH HEREBY WAIVE TRIAL BY JURY IN ANY PROCEEDING RELATING TO THIS AGREEMENT, ANY TRANSACTION HEREUNDER OR ANY RELATED MATTERS. IN WITNESS WHEREOF, this Vendor Program Agreement is executed as of the date set forth above. NATIONSCREDIT COMMERCIAL EXCEL SWITCHING CORPORATION CORPORATION By /s/ WILLIAM GMAZ By /S/ STEPHEN S. GALLIKER ------------------------------ ---------------------------------- Title: Senior Vice President Title: Chief Financial Officer -11- EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EXCEL SWITCHING CORPORATION'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE PERIOD ENDING MARCH 31, 1999. 1,000 U.S. DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 58,738 66,965 36,220 (2,500) 9,476 183,275 20,674 0 223,230 45,825 0 0 0 345 173,102 223,230 36,615 36,615 10,785 10,785 15,500 0 (1,349) 11,679 4,263 7,416 0 0 0 7,416 .22 .19
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