<PAGE>
As filed with the Securities and Exchange Commission on April 26, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Cortelco Systems, Inc.
(Name of Registrant as specified in its charter)
Delaware 3661 62-1482176
(Primary Standard Industrial (I.R.S. Employer
(State or other Classification Code) Identification No.)
jurisdiction of
incorporation or
organization)
4119 Willow Lake Blvd.
Memphis, TN 38118
(901) 365-7774
(Address and telephone number of principal executive offices and principal
place of business)
J. Michael O'Dell
President and Chief Executive Officer
Cortelco Systems, Inc.
4119 Willow Lake Blvd.
Memphis, TN 38118
(901) 365-7774
(Name, address and telephone number of agent for service)
Copies to:
James C. Kitch, Esq. Alan Dean, Esq.
COOLEY GODWARD LLP DAVIS POLK & WARDWELL
Five Palo Alto Square 450 Lexington Avenue
3000 El Camino Real New York, NY 10017
Palo Alto, California 94036 (212) 450-4000
(650) 843-5000
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Approximate date of proposed sale to the public: As soon as practicable
after the registration statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Aggregate Amount of
Title of Securities to be Registered Offering Price(1) Registration Fee
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<S> <C> <C>
Common Stock, $.001 par value........................... $35,000,000 $9,730
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act
of 1933.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
registration statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This prelimi- +
+nary prospectus is not an offer to sell nor does it seek an offer to buy +
+these securities in any jurisdiction where the offer or sale is not permit- +
+ted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject To Completion, Dated April 26, 1999
Prospectus
Shares
[Cortelco Logo Appears Here]
Cortelco Systems, Inc.
Common Stock
(Par value $.001 per share)
Cortelco Systems, Inc. is offering shares of its common stock. The selling
stockholders are offering an additional shares. We will not receive any of
the proceeds from the sale of shares by the selling stockholders. This is our
initial public offering and no public market currently exists for our common
stock. We estimate that the initial public offering price will be between $
and $ per share.
We have filed an application to qualify our common stock for quotation on the
Nasdaq National Market under the symbol "CORT."
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discounts Cortelco Stockholders
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<S> <C> <C> <C> <C>
Per Share $ $ $ $
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Total $ $ $ $
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</TABLE>
Cortelco has granted the underwriters the right to purchase up to an additional
shares ofcommon stock to cover over-allotments.
J.P. Morgan & Co.
Needham & Company, Inc.
A.G. Edwards & Sons, Inc.
, 1999
<PAGE>
Demanding Customers Choose Cortelco
for Feature-Rich Communications Solutions
Circuit City Los Angeles Dodgers
Circuit City has widely implemented Cortelco has equipped Dodger Stadium
Cortelco's products in stores with its Millennium communications
throughout the U.S. Circuit City's systems, Cortelco Voice Processing
customer service centers use the System, Real-Time Automatic Call
call center management features of Distributor and Orbit Wireless
our Real-Time Automatic Call Communications System. The Cortelco
Distributor package. The solution handles both general
Millennium's flexible call routing stadium communications traffic and
and automatic call distribution automatic call distribution for the
capabilities and its easy club's Merchandise and Special Event
installation and programming were Ticket agents.
important factors in choosing a
Cortelco solution.
Automatic Call Distribution
In-building & Campus Centralized Voice
Wireless Functionality Processing & Unified
Messaging
Remote Agent & Telecommuting Internet Protocol
Services Services
Computer Telephony Circuit Switched
Integration Data
Federal Aviation Administration Walt Disney's Celebration Schools
Every time a general aviation pilot Walt Disney's Celebration School in
files a flight plan or checks Florida has installed two Millennium
weather and national airspace communications systems. The systems
information, the call is routed provide general purpose voice
through a Cortelco DSP Automatic communications and connection for
Call Distributor. The DSP Series video conferencing for distance
provides the FAA with a feature-rich learning. The Cortelco Voice
platform for full voice routing and Processing System supports parent-
control functionality as well as for teacher communications. The Orbit
applications such as computer Wireless Communications System
telephony integration, skill-based provides teachers and administrators
routing and remote agents. with mobile communications
throughout the campus.
<PAGE>
Cortelco Provides Flexible Networked Systems for Voice, Video and Data
Communications
Automatic Call
Distribution: Provides
real-time routing and
built-in networking
for traditional or
virtual call centers.
In-building & Campus Centralized Voice
Wireless Processing & Unified
Functionality: The Messaging: Cortelco's
Orbit Wireless VPS links multiple
Communications System networked locations
provides private into a single voice
mobile voice and fax messaging
communications without system. Integration of
airtime charges. e-mail with unified
messaging available in
1999.
Cortelco's Multi-Site
Networked Digital
Communications Platforms
Remote Agent & Internet Protocol
Telecommuter Services: Services: Provides a
Provides access to gateway for Internet
full desk-top services, such as
functionality for voice-over-IP, virtual
remote service agents private networks and
and telecommuters. virtual call centers.
Available 1999.
Computer Telephony Circuit Switched Data:
Integration: Provides Converges voice and
connectivity between data communications
telephony and computer through built-in
platforms to allow support of virtually
access to proprietary any switched digital
and third party communications device
programs. such as
videoconferencing
systems.
<PAGE>
Table of Contents
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Page
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Prospectus Summary.................... 1
Risk Factors.......................... 4
Forward-Looking Statements............ 9
Company Background.................... 9
Use of Proceeds....................... 10
Dividend Policy....................... 10
Capitalization........................ 11
Dilution.............................. 12
Selected Pro Forma Consolidated
Financial Data....................... 13
Selected Consolidated Financial Data.. 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................ 15
</TABLE>
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Page
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Business............................ 21
Management.......................... 33
Principal and Selling Stockholders.. 40
Certain Transactions................ 42
Description of Capital Stock........ 44
Shares Eligible for Future Sale..... 46
Underwriting........................ 47
Legal Matters....................... 49
Experts............................. 49
Additional Information.............. 49
Index to Financial Statements....... F-1
</TABLE>
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In deciding whether to buy our common stock, you should rely only on the
information contained in this prospectus. To understand this offering fully,
you should read this entire prospectus carefully, including the financial
statements and notes. Individual sections of this prospectus, such as the
Prospectus Summary, are not complete and do not contain all of the information
that you should consider before investing in our common stock. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of the common stock.
Until , all dealers that buy, sell or trade our common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
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<PAGE>
Prospectus Summary
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus. This prospectus contains forward-looking statements. The
outcome of the events described in these forward-looking statements is subject
to risks and uncertainties and actual results could differ materially. The
sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" contain a
discussion of some of the factors that could contribute to those differences.
Cortelco Systems, Inc.
Cortelco designs, develops and markets integrated enterprise communications
systems for routing and controlling the voice, video and data communications of
businesses and other organizations. Our solutions are primarily designed for
enterprises with complex communications needs and small and medium-sized
telephony installations, typically between 25 to 500 communications ports. We
serve a range of vertical markets such as education, retail, government
agencies, emergency-911 services and catalog sales. Some of our customers have
multiple installations networked together and are as large as national retail
chains or multi-location branches of the U.S. government. Our customers include
Circuit City, U-Haul, the Federal Aviation Administration ("FAA"), Bell
Atlantic and Budget Rent-A-Car. Our products are installed in over 7,100
locations worldwide. In addition to selling our products, we also resell
cellular airtime, cellular telephones and third-party voice communications
systems in Puerto Rico. Our products have won numerous awards, including "Best
of Show" awards at CT Expo in 1997 and 1998 and "Product of the Year" awards in
1997 and 1998 from Call Center magazine and in 1999 from Call Center Solutions
magazine.
Beginning in the second quarter of fiscal 1998, under the leadership of a new
president, we refocused our overall marketing strategy and began to target
markets for which our systems and product lines are particularly well-suited.
Product development programs have been directed to new software and other
initiatives to strengthen our systems and product lines and generally improve
gross margins. We also increased our sales staff and expanded our dealer and
value added reseller network. As a result of these initiatives, on a pro forma
basis, our revenues increased 36.9% from $17.7 million for the six months ended
January 31, 1998 to $24.2 million for the six months ended January 31, 1999.
Our communications systems are based on two platforms, the Millennium and the
DSP Series. Both platforms are based on flexible, modular hardware and software
architectures that are easy to configure. Our platforms support multi-site
networking and other advanced features such as dynamic call routing,
interactive voice response, voicemail and computer telephony integration. The
Millennium is a full-function routing and control system that primarily serves
customers averaging approximately 110 communications ports per installation and
addresses a broad range of voice, video and data communications requirements.
The Millennium also includes automatic call distribution features. The DSP
Series is primarily an advanced automatic call distribution system that also
includes a full-function routing and control system. The DSP Series is
typically used in installations requiring advanced computer telephony
integration applications such as those used in sophisticated call centers. Both
the Millennium and the DSP Series interface with a variety of popular third-
party products through standard protocols.
We provide integrated communications systems flexible enough to meet the
immediate needs of enterprises with small to medium-sized installations, yet
scalable enough to accommodate these businesses and organizations as they grow.
Key elements of our strategy include: (1) target enterprises with small to
medium-sized installations at one or more locations; (2) provide customers with
cost-effective, integrated solutions for their voice communications
requirements; (3) expand both our direct sales force and our dealer network to
more aggressively pursue our target markets; and (4) continue to enhance our
core product lines and develop new features and applications that leverage our
existing Millennium and DSP Series platforms. Current development efforts
address emerging market needs, such as unified messaging, voice-over-Internet
Protocol ("IP") and Web-based virtual call center capabilities.
In April 1999, Cortelco merged with Cortelco Systems Puerto Rico and acquired
BCS Technologies, Inc. ("BCS"). See "Company Background." We are a Delaware
corporation with executive offices located at 4119 Willow Lake Blvd., Memphis,
Tennessee 38118 and our telephone number is (901) 365-7774. Our Web site
address is www.cortelcosystems.com. The information on our Web site is not part
of this prospectus.
1
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The Offering
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<S> <C>
Common stock offered by Cortelco............. shares
Common stock offered by the selling
stockholders................................ shares
Common stock outstanding after the offering.. shares
Use of proceeds.............................. To repay debt and for working
capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... CORT
</TABLE>
Unless otherwise indicated, the references to numbers and percentages of shares
of common stock in this prospectus assume that (1) the underwriters' over-
allotment option is not exercised and (2) 1,463,206 shares of Series A
Convertible Preferred Stock shall, by its terms, convert into 1,434,894 shares
of common stock upon the closing of this offering.
All references to shares of common stock in this prospectus reflect the impact
of a 1-for-10 reverse split of the common stock effected in April 1999.
The information above excludes 2,796,495 shares of common stock reserved for
future issuance under our equity incentive plans and employee stock purchase
plan. As of April 15, 1999, we have granted options to purchase up to 698,105
shares of common stock, shares of which will be exercisable upon the
closing of this offering. See "Management--Stock Incentive Plans."
2
<PAGE>
Summary Financial Data
The following table contains summary pro forma and historical financial data of
Cortelco. The summary pro forma financial data should be read together with our
Unaudited Pro Forma Consolidated Financial Information and related notes,
Cortelco's consolidated financial statements and related notes, BCS' financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The summary historical
financial data should be read together with Cortelco's consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The pro forma financial data in the table below reflects adjustments to the
historical financial statements of Cortelco that (1) reflect the purchase
method of accounting for the acquisition of BCS and (2) eliminate the results
of operations and related assets and liabilities not acquired from the merger
with Cortelco Systems Puerto Rico.
The pro forma as adjusted balance sheet data is adjusted to reflect the sale of
shares of common stock in this offering, the net proceeds from which are
estimated to be approximately $ after deducting underwriting discounts and
commissions and estimated offering expenses payable by Cortelco.
Dollars in thousands
<TABLE>
<CAPTION>
------------------------------------
Six Months Ended
Year Ended ------------------------
July 31, January 31, January 31,
Consolidated Statement of Operations 1998 1998 1999
Data: ---------- ----------- -----------
<S> <C> <C> <C>
Pro Forma (unaudited)
Net revenues............................. $ 37,395 $ 17,672 $ 24,197
Gross profit............................. 16,747 7,741 12,058
Operating expenses....................... 15,717 7,886 9,083
Income (loss) from operations............ 1,030 (145) 2,975
Net income (loss)........................ $ (221) $ (616) $ 1,607
Historical
Net revenues............................. $ 30,949 $ 15,296 $ 17,482
Gross profit............................. 12,445 6,153 7,175
Operating expenses....................... 11,452 5,826 6,154
Income (loss) from operations............ 993 327 1,021
Net income (loss)........................ $ (133) $ (152) $ 513
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
At January 31, 1999
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $ 160 $ 1,866 $
Working capital.................................. 2,489 6,132
Goodwill, net.................................... -- 5,188 5,188
Total assets..................................... 19,590 29,600
Long term debt................................... 6,282 2,572 --
Common stock..................................... 4 8
Total stockholders' equity (deficit)............. (609) 11,187
</TABLE>
3
<PAGE>
Risk Factors
This offering involves a high degree of risk. You should carefully consider the
risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock.
This prospectus also contains certain forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. Our actual results could differ
materially from those discussed in these statements. Factors that could
contribute to these differences include those discussed below and elsewhere in
this prospectus.
Our Quarterly Operating Results May Fluctuate
Our operating results are likely to fluctuate significantly from quarter to
quarter in the future due to a number of factors, many of which are beyond our
control. As a result, our operating results will likely not meet expectations
in some future quarters, which could have a material adverse effect on the
market price of our common stock. Factors that could affect our quarterly
operating results include the following:
. variations in the mix of products sold
. variations in the timing or size of orders from our customers
. delays or difficulties in introducing new products and/or in
implementing common applications across both our Millennium and DSP
Series platforms
. price decreases and other actions by our competitors
Quarterly operating results are also likely to fluctuate due to seasonal
factors that affect customers in some of our vertical markets. For example,
U.S. government customers typically make substantial purchases during the
quarter ended October 31, the last quarter of the government's fiscal year, and
these purchases decline significantly in the next quarter. Customers in other
vertical markets such as education and retail have also exhibited seasonal
buying patterns and do not purchase substantial amounts of equipment during the
quarter ended January 31. As a result, revenues in the quarter ended January 31
are often lower than in the previous quarter.
The uncertainty of our sales cycle also makes the timing of sales difficult to
predict and may cause fluctuations in our quarterly operating results. The
purchase of our products may involve a significant commitment of our customers'
personnel, financial and other resources to conduct technical evaluations, to
support installation and training and to fund purchases. As a result, our sales
cycles vary from one to six months for Millennium systems, which range in price
from $22,000 to $36,000 depending on the system configuration, and from four to
twelve months for DSP Series systems, which range in price from $75,000 to
$230,000 depending on the system configuration. Additionally, our reliance on
authorized dealers and value added resellers to market our products makes it
even more difficult to predict the timing of sales because we have little
control over their selling efforts to end-user customers.
We generally recognize revenues on the date of shipment for Millennium systems,
but upon acceptance for DSP Series systems due to the customized nature of the
installation. Delays in shipment or acceptance due to late deliveries by our
contract manufacturers and other factors beyond our control could adversely
affect revenues in a quarter.
Our Recent Results Have Been Affected by One Large Customer
Our recent revenues have been significantly influenced by one large customer,
the FAA. In June 1998, we began installing DSP Series systems in approximately
61 FAA sites. The FAA contract accounted for $5.2 million in revenues, or 21.5%
of our pro forma revenues, for the six months ended January 31, 1999. The FAA
contract is expected to be completed in May 1999. We cannot guarantee that we
will be able to obtain sufficient additional customer contracts to avoid a
decline in revenues after the FAA contract is completed.
We Have a Limited Combined Operating History
We have a limited combined operating history because we only recently acquired
BCS and merged with Cortelco Systems Puerto Rico. Our operating results may be
adversely affected if we are not able to realize anticipated operating
efficiencies through the consolidation of certain administrative and corporate
functions and if we are not able to effectively integrate our corporate
cultures. See "Company Background."
4
<PAGE>
Our Industry Is Highly Competitive with Many Established Competitors
The market for our products is highly competitive and subject to rapid
technological change. We expect competition to increase significantly in the
future. Our principal competitors in the voice communications equipment market
include Lucent Technologies, Mitel, NEC, Nortel Networks and Siemens. We also
compete with Aspect Telecommunications and Rockwell Electronic Commerce in the
call center market. As voice and data communications networks converge, data
equipment vendors such as Cisco Systems and 3Com may also compete in our
market. In addition, alliances and mergers between telecommunications and
computer companies may strengthen our competitors' positions or result in new
entrants into our market.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, customer services and other resources, greater
name recognition and a larger installed customer base than we do. As a result,
our competitors may be able to respond to new or emerging technologies and
changes faster than we can. They may also be able to devote greater resources
to the development, promotion and sale of their products. Actions by our
competitors could result in price reductions, reduced margins and loss of
market share, any of which would have a material adverse effect on our
financial condition. We cannot assure you that we can compete successfully
against our competitors or that competitive pressures would not have a material
adverse effect on our financial condition and operating results.
We Rely on Independent Dealers
We have a limited direct sales force and rely on our dealers and value added
resellers to market our products. Authorized dealers and value added resellers
accounted for approximately 30% of our pro forma revenues in fiscal 1998.
Generally, our authorized dealers and value added resellers have no obligation
to sell our products and in many cases also offer our competitors' products.
Our authorized dealers and value added resellers could discontinue selling our
products at any time in favor of our competitors' products or for any other
reason. A reduction or loss of orders from our dealers and value added
resellers could have a material adverse effect on our operating results and
financial condition.
We Need to Increase Our Sales Capability
In order to increase sales, both domestically and internationally, we will need
to add to our direct sales force, expand existing distribution channels and
establish new distribution channels for our products. A failure to increase
existing or establish new distribution channels or hire personnel necessary to
develop and enhance such distribution channels could have a material adverse
effect on our operating results and financial condition. We have increased our
sales force by approximately 48% since March 31, 1998. We cannot assure you
that new sales personnel, dealers and value added resellers will be effective
at increasing sales or will achieve the same levels of productivity as our
existing sales resources. In addition, as we expand our distribution channels,
our direct sales force, dealers and value added resellers may compete with each
other for the same customers.
We Must Keep Pace with Rapid Technological Change to Remain Competitive
The markets for our products are characterized by rapid technological change,
evolving industry standards, changes in end-user customer requirements and
frequent new product introductions and enhancements. Our future success will
depend upon our ability to enhance our existing products and to develop and
introduce new products that will achieve market acceptance. A key feature of
our product platforms is their ability to integrate with most standard
protocols and transmission systems, computer telephony integration and
automatic call distribution applications and protocols, operating systems and
databases. In the event that our product platforms cannot be readily integrated
with third-party technology or newly developed technological advances which we
may fail to predict, we could be required to redesign our core product
platforms. In addition, the introduction or market acceptance of products
incorporating superior technologies or the emergence of alternative
technologies and new industry standards could also render our existing
products, as well as products currently under development, obsolete and
unmarketable. Redesigning any of our products may require significant
resources, and any failure to release new products or to enhance or redesign
our existing products in a timely manner could have a material adverse effect
on our operating results and financial condition.
We Depend on a Single Source of Supply for Some Components
Our products are manufactured using components or subassemblies procured from
third-party suppliers. We receive some electronic components from a single
source. For example, we rely on Siemens to provide the digital signal
processors and associated chip sets for our Millennium and DSP Series products.
We rely on Natural Microsystems to supply the voice processors for our Cortelco
Voice Processing System and on CTP Systems to supply our Orbit Wireless
Communications handsets and base stations. Any interruption in the availability
of components from our key suppliers
5
<PAGE>
could adversely affect our ability to meet our scheduled product deliveries. We
also could experience difficulties in identifying alternative sources or
modifying product designs to use alternative components. Resulting delays or
reductions in product shipments could damage customer relationships and
adversely affect our operating results. Further, a significant increase in the
price of one or more third-party components or subassemblies would have a
material adverse effect on our gross profit and operating results.
We Depend on Third-Party Contract Electronic Manufacturers
We depend heavily upon the manufacturing capabilities of CMC Industries, Inc.
and Pensar Corporation, our primary contract electronic manufacturers. Our
ability to deliver products on a timely basis could be adversely affected by
any failure of CMC or Pensar to manufacture our products. In addition, we could
have difficulty finding other manufacturers to build our products. Resulting
delays in manufacturing or shipping or an inability to meet customer orders
could adversely affect our customer relationships and our operating results.
Our Failure to Manage Growth Could Adversely Affect Us
The growth of our business has placed, and may continue to place, a significant
strain on our limited personnel, management and other resources. Our current
management, personnel, systems, procedures and controls may be inadequate to
support our future operations. To manage future growth effectively, we will
need to attract, train, motivate, manage and retain employees successfully, to
integrate new employees into our overall operations and to continue to improve
our operations, financial and management systems. In addition, some of our
customers may require significant support for, and training on, our product
platforms, and we may not have sufficient resources to provide the levels of
service they require. Our failure to provide adequate service could have an
adverse impact on our relationship with our customers and could prevent us from
gaining new customers.
We Depend on Key Personnel and Need to Attract Qualified New Employees
We are dependent on the principal members of our management team and key
members of our engineering staff. If we lose any of these persons, our
business, financial condition and operating results may be adversely affected.
Due to the specialized nature of our business, we are highly dependent on the
continued service of, and on the ability to attract and retain, qualified
engineering, sales, marketing and senior management personnel. Highly skilled
employees with the education and training that we require, especially qualified
service technicians and employees with significant experience and expertise in
computer telephony integration applications, are in high demand. If we are
unable to hire additional qualified personnel as needed, we may not be able to
grow our business effectively, adequately manage and complete our existing
sales commitments or bid for and execute additional sales opportunities.
Failure to attract and retain the qualified personnel necessary for the
development of our business could have a material adverse effect on our
operating results and financial condition.
We Face Many Risks Associated with Expanding Our International Operations
Sales outside of the United States and Puerto Rico accounted for approximately
3% of our total pro forma revenues for the six months ended January 31, 1999
and were made primarily through our dealer network. We expect to increase sales
to customers outside of the United States as we establish our distribution
channels in the Caribbean and Latin America. However, foreign markets for our
products may develop more slowly than currently anticipated. We may not be able
to successfully establish international distribution channels, or we may not be
able to hire the additional personnel necessary to support such distribution
channels. In addition, payment cycles with customers located outside the United
States are generally longer than those within the United States.
Our Products May Have Undetected Errors Leading to Product Returns or Claims of
Liability
Our products, despite testing, may contain undetected errors or failures. The
occurrence of errors could result in product returns and other losses to us or
our customers. This occurrence also could result in the loss of, or delay in,
market acceptance of our products. In addition, any failure by our products to
properly perform could result in claims against us. Our purchase agreements
with our customers typically contain provisions designed to limit our exposure
to potential product liability claims. However, the limitation of liability
provisions contained in our purchase agreements may not be effective as a
result of federal, state or local laws or ordinances or unfavorable judicial
decisions in the United States or other countries. We maintain insurance to
protect against certain claims associated with the use of our products, but our
insurance coverage may not adequately cover all possible claims asserted
against us. In addition, even claims that ultimately are unsuccessful could
result in our expenditure of funds in litigation and management time and
resources.
6
<PAGE>
We May Be Subject to Intellectual Property Litigation
As we grow and gain brand recognition, our products are more likely to be
subjected to infringement litigation. Responding to, defending against, or
bringing claims related to our intellectual property rights could result in
substantial costs and diversion of management and technical resources which
could adversely affect our business, operating results and financial condition.
In addition, we rely on a combination of patent, trademark, copyright and trade
secret laws and contractual restrictions to establish and protect our
proprietary rights. These statutory and contractual arrangements may not
provide sufficient protection to prevent misappropriation of our technology or
to deter independent third-party development of similar technologies. Such
litigation could result in our expenditure of funds and management time and
resources.
Our Systems May Be Affected by Year 2000 Problems
We are heavily dependent upon the ability of our own computer or data-dependent
systems to correctly interpret century data. This includes, but is not limited
to, our systems in information, business, finance, operations and service. Any
failure or malfunctioning on the part of these or other systems could adversely
affect us in ways that are not currently known, discernible, quantifiable or
otherwise anticipated by us. We currently have only limited information on the
Year 2000 compliance of our key suppliers, manufacturers and customers. Our
business and operating results could experience material adverse effects if our
key suppliers or manufacturers were to experience Year 2000 issues that cause
them to delay production or shipment of key components or systems. In addition,
our operating results could experience material adverse effects if any of our
key customers encounter Year 2000 issues that cause them to delay or cancel
substantial purchase orders or delivery of our product. For a discussion of our
Year 2000 plans, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
We Are Controlled by Our Principal Stockholders and Management
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will own approximately shares,
or %, of the outstanding shares of common stock, or shares, or %, if
the underwriters' over-allotment option is exercised in full. As a result, they
will have the ability to effectively control us and direct our affairs,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership also may have the effect of
delaying, deferring or preventing a change in control of our company and may
make some transactions more difficult or impossible without the support of
these stockholders. The interests of these stockholders may conflict with those
of other stockholders. We also have transactions with businesses in which our
principal stockholders maintain interests, such as CMC. We believe that these
transactions are conducted at an arm's length basis, but we cannot assure you
that these transactions would have the same terms if conducted with an
unrelated third-party.
Our Stock Previously Had No Active Public Market and Our Stock Price May Be
Volatile
Prior to this offering, there has been no public market for our common stock.
We have applied to list the common stock for trading on the Nasdaq National
Market. The initial public offering price will be determined by negotiations
among the underwriters, us and the selling stockholders and may not be
indicative of the market price for the common stock after this offering. We do
not know the extent to which investor interest will lead to the development of
a public market. Investors may not be able to resell the common stock at or
above the initial public offering price. Many factors could cause the market
price of the common stock after this offering to fluctuate substantially,
including future announcements concerning us or our competitors, variations in
operating results, loss of key customers, changes in pricing policies, or
changes in earnings estimates by analysts. General economic, political and
market conditions may also have a material adverse effect on the price of our
common stock.
Some Anti-Takeover Provisions May Affect Our Stock Price
The board of directors has the authority to issue up to 10,000,000 shares of
preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by the stockholders. The rights
of the holders of common stock may be adversely affected by the rights of the
holders of any preferred stock that may be issued in the future. Certain
provisions of our certificate of incorporation and bylaws may make it more
difficult for a third-party to acquire control of us without the consent of our
board of directors, even if such changes were favored by a majority of the
stockholders. These include provisions that provide for a staggered board of
directors, prohibit stockholders from taking action by written consent and
restrict the ability of stockholders to call special meetings.
7
<PAGE>
Significant Number of Shares Eligible for Future Sale May Decrease Our Stock
Price
Sales of substantial amounts of our common stock in the public market after
this offering, including shares issued upon the exercise of outstanding
options, or the perception that such sales could occur, could adversely affect
the market price of our common stock. These sales also might make it more
difficult for us to raise funds through future offerings of common stock.
Upon completion of this offering, we will have outstanding shares of common
stock. All of the shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act of 1933,
except for shares purchased by our "affiliates," as defined in Rule 144 under
the Securities Act. The remaining shares of common stock that will be
outstanding upon completion of this offering are "restricted securities" as
defined in Rule 144. These restricted securities may be sold in the future
without registration under the Securities Act to the extent permitted under
Rule 144, Rule 701, or another exemption under the Securities Act. Cortelco,
our officers, directors and stockholders will agree not to, without the
prior written consent of J.P. Morgan Securities Inc., directly or indirectly,
sell, offer, contract to sell, transfer the economic risk of ownership in, make
any short sale, pledge or otherwise dispose of any shares of common stock or
any securities convertible into, or exchangeable, or exercisable for, or any
other rights to purchase or acquire shares of common stock owned by them during
the 180-day period commencing on the date of this prospectus.
8
<PAGE>
Forward-Looking Statements
Statements contained in this prospectus may be forward-looking statements
concerning our operations, economic performance and financial condition.
Forward-looking statements are included, for example, in the discussions about:
the timing and availability of products under development; variations in
operating results; our strategy; Year 2000 issues; and the market for voice
communications equipment. Those forward-looking statements involve risks and
uncertainties and actual results may differ materially from those expressed or
implied in those statements. Factors that could cause differences include, but
are not limited to, those discussed under "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Company Background
We were incorporated on July 23, 1991 as one of several corporations related
through common ownership that were formed to hold various telecommunications
equipment and other businesses that had been acquired primarily from Alcatel,
N.V. in 1990. In August 1993, we became a subsidiary of Cortelco Systems
Holding Corporation, a corporation formed to act as the holding company for the
telecommunications equipment businesses, while CMC Industries, Inc., a contract
electronic manufacturer, became a separate company. See "Business--
Manufacturing." In March 1997, our subsidiary in the automatic call
distribution products business was spun off to the Cortelco Systems Holding
Corporation shareholders, merged with Business Communications Systems, Inc.,
and renamed "BCS Technologies, Inc."
In April 1999:
. Cortelco Systems Holding Corporation distributed its shares of
Cortelco common stock in a spin-off transaction
. we merged with Cortelco Systems Puerto Rico, Inc., another subsidiary
of Cortelco Systems Holding Corporation, in exchange for 553,880
shares
. we acquired BCS in exchange for 3,969,681 shares
BCS and Cortelco Systems Puerto Rico are now wholly-owned subsidiaries of
Cortelco.
9
<PAGE>
Use of Proceeds
Our net proceeds from the sale of the shares of common stock offered by us
are estimated to be approximately $ or approximately $ if the
underwriters exercise the over-allotment option in full, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. We will not receive any proceeds from the sale of common stock by the
selling stockholders.
We currently intend to use our net proceeds from this offering:
. to fully repay a $2.3 million long-term subordinated note with
ChinaVest IV, L.P. that accrues interest at an 8.0% annual rate and
matures on July 2002
. to fully repay $2.0 million of senior debt under two credit facilities
with Foothill Capital, one of which accrues interest at a rate equal
to the prime rate plus .375% and matures in July 2001, and the other
of which accrues interest at a rate equal to the prime rate plus 1.25%
and matures on August 2001
. for working capital and general corporate purposes
We may also use some of the proceeds to acquire other companies, technologies
or products that complement our business, although we have not yet developed
any plans regarding these transactions. Pending use of the net proceeds as
described above, we intend to invest the net proceeds from this offering in
short-term, investment-grade securities.
Dividend Policy
We have declared cash dividends in the past in connection with intercompany
financing transactions with our parent company. See "Certain Transactions."
Cortelco currently anticipates that it will retain earnings to support
operations and finance the growth and development of its business and does not
anticipate declaring cash dividends for the foreseeable future. Future
dividends, if any, will be at the discretion of the board of directors, which
will base its decision on a number of factors, including our operating results
and financial requirements. The terms of our senior debt, which will be repaid
from the proceeds of this offering, prohibit the declaration and payment of
dividends without the approval of the lender.
10
<PAGE>
Capitalization
The following table sets forth our capitalization as of January 31, 1999 on an
actual basis, on a pro forma basis after giving effect to the acquisition of
BCS and on a pro forma as adjusted basis after giving effect to the sale of
shares of common stock in this offering and net proceeds after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. This table should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
------------------------------------
As of January 31, 1999
------------------------------------
Pro Forma
Actual(1) Pro Forma(2) As Adjusted
Dollars in thousands, except share data --------- ------------ -----------
<S> <C> <C> <C>
Long-term debt (excluding current portion)... $ 6,282 $ 2,572 $ --
Stockholders' equity (3):
Preferred stock, $.001 par value,
10,000,000 shares authorized; no shares
issued and outstanding, actual; 1,463,206
issued and outstanding, pro forma; no
shares issued and outstanding, pro forma
as adjusted............................... -- 686 --
Common stock, $.001 par value, 50,000,000
shares authorized; 3,920,252 shares issued
and outstanding, actual; 7,639,933 issued
and outstanding, pro forma; and shares
issued and outstanding, pro forma as
adjusted.................................. 4 8
Additional paid-in capital................. 8,324 19,545
Note receivable from parent................ (3,184) (3,184) (3,184)
Retained earnings (deficit)................ (5,753) (5,868)
<CAPTION>
--------- ------------ -----------
<S> <C> <C> <C>
Total stockholders' equity (deficit)..... (609) 11,187
<CAPTION>
--------- ------------ -----------
<S> <C> <C> <C>
Total capitalization..................... $ 5,673 $13,500 $
<CAPTION>
========= ============ ===========
</TABLE>
- -------------------
(1) Excludes 333,826 shares of common stock issuable upon exercise of options
outstanding as of January 31, 1999 and 116,174 shares reserved as of January
31, 1999 for future issuance under our equity incentive plan.
(2) Excludes 428,105 shares of common stock issuable upon exercise of options
outstanding as of January 31, 1999 and 118,391 shares reserved as of January
31, 1999 for future issuance under our equity incentive plan and the BCS 1997
Equity Incentive Plan assumed in connection with the acquisition of BCS.
(3) Upon the closing of this offering, the 1,463,206 shares of Series A
Convertible Preferred Stock shall, by its terms, convert into 1,434,894 shares
of common stock.
11
<PAGE>
Dilution
Our pro forma net tangible book value at January 31, 1999 was approximately
$5.0 million, or $0.65 per share of common stock. Pro forma net tangible book
value per share represents the amount of total assets, less: (1) goodwill and
identifiable intangible assets, (2) total liabilities and (3) preferred stock,
divided by the number of outstanding shares of common stock. After giving
effect to the sale of shares of common stock offered to new investors by
Cortelco at an assumed initial public offering price of $ per share, and
after deducting underwriting discounts and commissions and estimated offering
expenses, our pro forma net tangible book value at January 31, 1999 would have
been approximately $ , or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $ per
share to new investors. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Net tangible book value per share as of January 31, 1999.......... $0.65
<CAPTION>
-----
<S> <C> <C>
Pro forma increase in net tangible book value per share
attributable to new investors.................................... $
<CAPTION>
-----
<S> <C> <C>
Pro forma net tangible book value per share after this offering.....
<CAPTION>
----
<S> <C> <C>
Dilution per share to new investors................................. $
<CAPTION>
====
</TABLE>
The following table summarizes on a pro forma basis as of January 31, 1999, the
differences between the existing stockholders and the new investors with
respect to the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Shares Purchased Total Consideration
------------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................... % $ % $
New investors........... % %
<CAPTION>
------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total................. 100% $ 100%
<CAPTION>
======= ======== ========== ==========
</TABLE>
- -------------------
(1) Excludes 428,105 shares of common stock issuable upon exercise of options
outstanding as of January 31, 1999 and 118,391 shares reserved as of January
31, 1999 for future issuance under our equity incentive plan and the BCS 1997
Equity Incentive Plan assumed in connection with the acquisition of BCS.
12
<PAGE>
Selected Pro Forma Consolidated Financial Data
The following pro forma consolidated statements of operations data for the year
ended July 31, 1998 and the six months ended January 31, 1998 and 1999
represent the unaudited pro forma operating results as if the acquisition of
BCS had occurred as of August 1, 1997. The pro forma financial data reflects
adjustments to our consolidated financial statements that (1) reflect the
purchase method of accounting for the acquisition of BCS and (2) eliminate the
results of operations and related assets and liabilities not acquired from the
merger with Cortelco Systems Puerto Rico.
The pro forma financial data does not purport to represent what our results of
operations actually would have been had the transactions occurred on the dates
indicated, or to project our results of operations at any future date or for
any future period. The following pro forma financial data should be read in
conjunction with Cortelco's consolidated financial statements and related
notes, BCS' consolidated financial statements and related notes and the
Unaudited Pro Forma Consolidated Financial Information and related notes, all
of which are included elsewhere in this prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
-------------------------------------------------
Six Months Ended
Year Ended ----------------------------------
Dollars in thousands, July 31, 1998 January 31, 1998 January 31, 1999
except per share data ------------- ---------------- ----------------
<S> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues............... $ 37,395 $ 17,672 $ 24,197
Cost of revenues........... 20,648 9,932 12,139
<CAPTION>
------------- ---------------- ----------------
<S> <C> <C> <C>
Gross profit............. 16,747 7,741 12,058
Operating expenses:
Selling, general and
administrative........... 13,347 6,722 7,369
Research and development.. 2,111 1,034 1,584
Amortization of goodwill.. 259 130 130
<CAPTION>
------------- ---------------- ----------------
<S> <C> <C> <C>
Total operating
expenses................ 15,717 7,886 9,083
<CAPTION>
------------- ---------------- ----------------
<S> <C> <C> <C>
Income (loss) from
operations.............. 1,030 (145) 2,975
Interest expense........... 499 274 229
Management fee expense
(income), net............. 185 38 (10)
Other expenses (income),
net....................... 513 170 258
<CAPTION>
------------- ---------------- ----------------
<S> <C> <C> <C>
Income (loss) before
income taxes............ (167) (627) 2,498
Income tax expense
(benefit)................. -- (73) 885
<CAPTION>
------------- ---------------- ----------------
<S> <C> <C> <C>
Income (loss) before
minority interest....... (167) (554) 1,613
Minority interest ......... (54) (62) (6)
<CAPTION>
------------- ---------------- ----------------
<S> <C> <C> <C>
Net income (loss)........ $ (221) $ (616) $ 1,607
<CAPTION>
============= ================ ================
<S> <C> <C> <C>
Basic pro forma net income
(loss) per share.......... $ (0.03) $ (0.08) $ 0.20
Diluted pro forma net
income (loss) per share... $ (0.03) $ (0.08) $ 0.17
Weighted average shares
outstanding (1):
Basic..................... 8,155,000 8,146,000 8,157,000
Diluted................... 8,155,000 8,146,000 9,744,000
</TABLE>
- -------------------
(1) See notes to Unaudited Pro Forma Consolidated Financial Information for
determination of shares used in computing basic and diluted pro forma net
income (loss) per share.
13
<PAGE>
Selected Consolidated Financial Data
The selected consolidated financial data represent the results of Cortelco
Systems Puerto Rico and Cortelco and do not reflect the operating results of
BCS or the pro forma adjusting entries for the acquisition of BCS by Cortelco
in April 1999. The statement of operations data set forth below for each of the
fiscal years ended July 31, 1996, 1997 and 1998, and the selected balance sheet
data at July 31, 1997 and 1998, are derived from consolidated financial
statements audited by Deloitte & Touche LLP, independent auditors, whose
reports appear elsewhere in this prospectus. The consolidated balance sheet
data at July 31, 1996 is derived from audited financial statements not included
in this prospectus. The statement of operations data for the six months ended
January 31, 1998 and 1999 and the year ended July 31, 1995 and the balance
sheet data as of July 31, 1995 are derived from unaudited financial statements.
However, in the opinion of management, the selected financial data for such
periods include all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of the data. This data should be
read in conjunction with our consolidated financial statements and notes
thereto appearing elsewhere in this prospectus and "Management Discussion and
Analysis of Financial Condition and Results of Operations." The results of
operations for the six months ended January 31, 1999 are not necessarily
indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Year Ended July 31, Six Months Ended January 31,
------------------------------------------ ------------------------------
Dollars in thousands, 1995 1996 1997 1998 1998 1999
except per share data --------- --------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues........... $ 33,774 $ 38,518 $ 35,635 $ 30,949 $ 15,296 $ 17,482
Cost of revenues....... 23,919 26,742 24,153 18,504 9,143 10,307
--------- --------- --------- --------- -------------- --------------
Gross profit......... 9,855 11,776 11,482 12,445 6,153 7,175
Operating expenses:
Selling, general and
administrative....... 7,235 7,853 10,103 10,045 5,147 5,237
Research and
development.......... 1,403 1,256 1,310 1,407 679 917
Amortization of
goodwill............. -- -- -- -- -- --
--------- --------- --------- --------- -------------- --------------
Total operating
expenses............ 8,638 9,109 11,413 11,452 5,826 6,154
--------- --------- --------- --------- -------------- --------------
Income (loss) from
operations.......... 1,217 2,667 69 993 327 1,021
Interest expense....... 1,186 1,004 915 826 425 412
Management fee expense
(income), net......... 134 178 406 185 38 (10)
Other expenses
(income), net......... 83 (54) 272 61 (46) 30
--------- --------- --------- --------- -------------- --------------
Income (loss) before
income taxes........ (186) 1,539 (1,524) (79) (90) 589
Income tax expense .... -- 607 -- -- -- 70
--------- --------- --------- --------- -------------- --------------
Income (loss) before
minority interest... (186) 932 (1,524) (79) (90) 519
Minority interest...... -- -- -- (54) (62) (6)
--------- --------- --------- --------- -------------- --------------
Income (loss) from
continuing
operations.......... (186) 932 (1,524) (133) (152) 513
Discontinued
operations............ (958) (1,207) (515) -- -- --
--------- --------- --------- --------- -------------- --------------
Net income (loss).... $ (1,144) $ (275) $ (2,039) $ (133) $ (152) $ 513
========= ========= ========= ========= ============== ==============
Basic net income (loss)
per share............. $ (0.30) $ (0.07) $ (0.53) $ (0.03) $ (0.04) $ 0.13
Diluted net income
(loss) per share...... $ (0.30) $ (0.07) $ (0.53) $ (0.03) $ (0.04) $ 0.10
Weighted average shares
outstanding (1)(2):
Basic................. 3,825,000 3,825,000 3,825,000 3,918,000 3,909,000 3,920,000
Diluted............... 3,825,000 3,825,000 3,825,000 3,918,000 3,909,000 5,507,000
</TABLE>
- ------------------
(1) See note 19 to our consolidated financial statements for determination of
shares used in computing basic and diluted net income (loss) per share for the
years ended July 31, 1996, 1997 and 1998.
(2) See note 2 to our unaudited consolidated financial statements for
determination of shares used in computing basic and diluted net income (loss)
per share for the six months ended January 31, 1998 and 1999.
<TABLE>
<CAPTION>
------------------------------------------
At July 31,
------------------------------------------
1995 1996 1997 1998
Dollars in thousands --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents........... $ 76 $ 183 $ 320 $ 126
Working capital........ 4,836 6,364 4,510 2,329
Total assets........... 20,169 21,830 18,417 17,835
Long term debt......... 2,903 2,751 5,621 6,400
Common stock........... 4 4 4 4
Total stockholders'
equity (deficit)...... 5,175 4,900 1,611 (1,122)
</TABLE>
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of our results of operations and financial condition
should be read in conjunction with the consolidated financial statements and
related notes and other financial information included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may be materially different from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this prospectus.
Overview
Cortelco designs, develops and markets integrated enterprise communications
systems for routing and controlling the voice, video and data communications of
businesses and other organizations. Our solutions are primarily designed for
small and medium-sized telephony installations in a range of vertical markets
such as education, retail, government agencies, emergency-911 services and
catalog sales. Our operations are conducted through three business units:
Systems Business Operations, ACD Business Operations and Caribbean and Latin
American Operations. The Systems Business Operations unit primarily focuses on
the Millennium product line. The ACD Business Operations unit primarily focuses
on the DSP Series product line. The Caribbean and Latin American Operations
unit currently distributes the Millennium and DSP Series systems and resells
cellular airtime, cellular telephones and third-party voice communications
systems in Puerto Rico.
In April 1999, Cortelco merged with its sister company, Cortelco Systems Puerto
Rico, which became the Caribbean and Latin American Operations unit, and
acquired BCS, which became the ACD Business Operations unit. Prior to April
1999, our three business units shared substantial common ownership and prior to
March 1997 had been part of the same corporate family. See "Company
Background." Cortelco and Cortelco Systems Puerto Rico had previously been
subsidiaries of Cortelco Systems Holding Corporation. As a result, the merger
of Cortelco and Cortelco Systems Puerto Rico has been recorded for all periods
presented at historical costs and the financial statements are presented on a
consolidated basis for all historical periods. BCS had previously been
partially owned by certain stockholders of Cortelco. As a result, the
acquisition of BCS has been accounted for using the purchase method of
accounting for the portion of BCS not owned through common ownership prior to
the acquisition and using historical costs for the portion of BCS that was
owned through common ownership prior to the acquisition. Goodwill in the amount
of $5.2 million was recorded in the BCS acquisition and is being amortized over
20 years.
Our revenues are primarily derived from our sale of Millennium and DSP Series
systems, related systems products and services and the resale of cellular
airtime, cellular telephones and third-party voice communications systems in
Puerto Rico. Revenue is recognized upon shipment of product to our dealers and
end-user customers for Millennium systems and third-party systems, and upon
acceptance for DSP Series systems due to the customized nature of each
installation. In addition, our Caribbean and Latin American Operations unit
generates revenue from the resale of cellular airtime and cellular telephones
in Puerto Rico and recognizes these revenues when earned. Typical selling
prices range from $22,000 to $36,000 for Millennium systems and $75,000 to
$230,000 for DSP Series systems, depending on the system configuration. For the
six months ended January 31, 1999, on a pro forma basis, we generated
approximately 46% of our revenue from the sale of Millennium products and
approximately 31% from the sale of DSP Series products. Pro forma revenues
increased 36.9% from $17.7 million for the six months ended January 31, 1998 to
$24.2 million for the six months ended January 31, 1999.
In the past several years, we have undergone some significant changes. In
fiscal 1994, we introduced a new digital platform, the Millennium, to replace
an older analog product, which was ultimately discontinued in fiscal 1998.
During fiscal 1996 and fiscal 1997, we sold a substantial number of Millennium
systems to a single customer for installations in Southeast Asia. This customer
ceased placing new orders with us in 1997 due to general economic instability
in Southeast Asia, which resulted in a $2.4 million decrease in purchases by
this customer in fiscal 1998 as compared to fiscal 1997. Moreover, in fiscal
1997, Cortelco Systems Puerto Rico redirected its marketing of cellular airtime
and cellular telephones to focus on higher quality customers, mainly
businesses, in order to minimize credit losses and increase margins. This
resulted in a reduction of Cortelco Systems Puerto Rico's revenues from the
resale of cellular airtime and cellular telephones from $9.8 million in fiscal
1997 to $6.7 million in fiscal 1998. Beginning in the second quarter of fiscal
1998, Cortelco, under the leadership of a new president, refocused its overall
marketing strategy and began to target markets for which the Millennium system
is particularly well-suited. Product development programs have been directed to
new software and other initiatives to strengthen the Millennium product line
and increase gross margins. We also increased our sales staff and expanded our
dealer and value added reseller network. As a result of these changes and
programs, Cortelco has become profitable and our operating results have
continued to improve in recent quarters.
15
<PAGE>
Pro Forma Results of Operations
As a result of the recent acquisition of BCS, our historical financial
statements for past periods do not accurately reflect our current results of
operations. We have therefore included the results of operations on a pro forma
basis so that you can better understand our business. The following tables
present the pro forma results for the three months ended October 31, 1997 and
1998 and January 31, 1998 and 1999 as if the acquisition of BCS had occurred as
of August 1, 1997. We believe that all necessary adjustments, consisting of
only normal recurring adjustments, have been included in the amounts stated
below. The pro forma financial data are presented for illustrative purposes
only and do not purport to represent what our results of operations actually
would have been had the transactions occurred on the dates indicated, or to
project our results of operations for any future period. This data should be
read in conjunction with the Unaudited Pro Forma Consolidated Financial
Information and the related notes, our consolidated financial statements and
the related notes and BCS' financial statements and the related notes, all of
which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
------------------------------------------
Three Months Ended
------------------------------------------
October 31, January 31,
-------------------- --------------------
Dollars in thousands, except per 1997 1998 1998 1999
share data --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net revenues...................... $ 9,263 $ 12,487 $ 8,409 $ 11,710
Cost of revenues.................. 5,242 6,131 4,689 6,008
--------- --------- --------- ---------
Gross profit..................... 4,021 6,356 3,720 5,702
Operating expenses:
Selling, general and
administrative.................. 3,354 3,523 3,368 3,846
Research and development......... 501 770 533 814
Amortization of goodwill......... 65 65 65 65
--------- --------- --------- ---------
Total operating expenses........ 3,920 4,358 3,966 4,725
Income (loss) from operations... 101 1,998 (246) 977
Interest expense.................. 136 116 138 113
Management fee expense (income),
net.............................. 53 (5) (15) (5)
Other expenses.................... 92 122 78 136
--------- --------- --------- ---------
Income (loss) before income
taxes.......................... (180) 1,765 (447) 733
Income tax expense (benefit)...... (73) 567 -- 318
--------- --------- --------- ---------
Net income (loss) before
minority interest.............. (107) 1,198 (447) 415
Minority interest................. (36) (1) (26) (5)
--------- --------- --------- ---------
Net income (loss)............... $ (143) $ 1,197 $ (473) $ 410
========= ========= ========= =========
Basic pro forma net income (loss)
per share........................ $ (0.02) $ 0.15 $ (0.06) $ 0.05
Diluted pro forma net income
(loss) per share................. $ (0.02) $ 0.12 $ (0.06) $ 0.04
Weighted average shares
outstanding (1):
Basic............................ 8,146,000 8,156,000 8,146,000 8,157,000
Diluted.......................... 8,146,000 9,744,000 8,146,000 9,744,000
</TABLE>
- -------------------
(1) See notes to Unaudited Pro Forma Consolidated Financial Information for
determination of shares used in computing basic and diluted pro forma net
income (loss) per share.
Quarterly results of operations, in particular the quarters ended October 31
and January 31, are likely to fluctuate due to a number of factors, including
seasonal factors that affect customers in some of our vertical markets. For
example, U.S. government customers typically make substantial purchases during
the quarter ended October 31, the last quarter of the government's fiscal year,
and these purchases decline significantly in the next quarter. Customers in
other vertical markets such as education and retail have also exhibited
seasonal buying patterns and do not purchase substantial amounts of equipment
during the quarter ended January 31. As a result, revenues in the quarter ended
January 31 are often lower than in the previous quarter. The uncertainty of our
sales cycle also makes the timing of sales difficult to predict and may cause
fluctuations in our quarterly results of operations. The purchase of our
products may involve a significant commitment of our customers' personnel,
financial and other resources to conduct technical evaluations, to support
installation and training and to fund purchases. As a result, our sales cycles
vary from one to six months for Millennium systems and from four to twelve
months for the DSP Series systems. See "Risk Factors--Our Quarterly Operating
Results May Fluctuate."
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Revenues. Our revenues are primarily derived from the sales of Millennium and
DSP Series systems, related systems products and services and the resale of
cellular airtime, cellular telephones and third-party voice communications
systems in Puerto Rico. Our pro forma quarterly revenues have increased over
the prior year for the quarters ended October 31, 1998 and January 31, 1999 due
primarily to the FAA contract, enhancements of our product line and expansion
of our sales force. Systems revenue from sales of third-party voice
communications systems in Puerto Rico generally account for approximately 5% to
10% of pro forma total revenues in each quarter. Our pro forma cellular airtime
and cellular telephone revenues have generally decreased as a percentage of
total revenues since the quarter ended October 1997, primarily due to our
limiting sales activities to higher quality customers, and were 10.5% of pro
forma revenues for the quarter ended January 31, 1999. Our pro forma revenues
for the quarters ended January 31, 1998 and 1999 have been influenced by
seasonal buying patterns in some of our vertical markets. Consequently, pro
forma revenues are lower in the quarters ended January 31 than in the quarters
ended October 31. Furthermore, our revenues were adversely affected in the
first half of 1998 due to a decrease in orders from our single largest customer
due to general economic instability in Southeast Asia and the unexpected loss
of a key sales executive. Pro forma revenues reflect purchases by the FAA of
$2.6 million and $2.6 million for the last two quarters ended January 31, 1999
under a contract scheduled to expire in April 1999. Although revenues from the
U.S. government are likely to decline after April 1999 due to the completion of
installations under the FAA contract, we expect U.S. government agencies to
continue to account for a significant portion of our systems revenue. See "Risk
Factors--Our Recent Results Have Been Affected by One Large Customer."
Pro forma revenues increased 36.9% from $17.7 million for the six months ended
January 31, 1998 to $24.2 million for the six months ended January 31, 1999.
The increase was primarily due to $5.2 million in purchases of DSP Series
systems by the FAA and an increase in Millennium revenues of $2.3 million,
partially offset by a decrease in cellular revenues of $0.7 million. Millennium
systems sales increased primarily due to the expansion of our sales force and
the introduction of new product features during the last year, while cellular
revenues decreased during the period due primarily to our decision to target
higher quality customers. For the six months ended January 31, 1999, the FAA
accounted for 21.5% of our total pro forma revenues.
Cost of Revenues and Gross Profit. Cost of revenues consists primarily of
purchases from our contract manufacturers and other suppliers. Lower pro forma
gross profit in the quarters ended January 31, 1998 and 1999 were due primarily
to seasonal declines in revenues caused by our customers' purchasing cycles.
Pro forma gross profit increased in year over year comparative quarters due
primarily to higher revenues and a change in product mix in favor of higher
margin products, primarily DSP Series systems.
Pro forma gross profit increased 55.8% from $7.7 million for the six months
ended January 31, 1998 to $12.1 million for the six months ended January 31,
1999. The increase was primarily due to an increase in DSP Series gross profit
from $1.6 million for the six months ended January 31, 1998 to $5.0 million for
the six months ended January 31, 1999. Millennium systems gross profit
increased from $4.6 million for the six months ended January 31, 1998 to $6.3
million for the six months ended January 31, 1999 due primarily to higher
revenues. Gross profit from the resale of cellular airtime and cellular
telephones decreased from $1.1 million for the six months ended January 31,
1998 to $0.9 million for the six months ended January 31, 1999 due primarily to
lower cellular revenues. Pro forma gross margin increased from 43.8% for the
six months ended January 31, 1998 to 49.8% for the six months ended January 31,
1999 due primarily to the increase in DSP Series revenues and an increase in
gross margin for the DSP Series from 62.0% of DSP Series revenues for the six
months ended January 31, 1998 to 65.0% of DSP Series revenues for the six
months ended January 31, 1999.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and benefit costs, advertising and trade
show related costs, and facilities and other overhead expenses incurred to
support the growth of our business. Costs incurred for final assembly, quality
assurance and installation of our systems are included as selling, general and
administrative expenses instead of cost of revenues. Selling, general and
administrative expenses generally increased in connection with the growth of
our business. We expect selling, general and administrative expenses to
increase as we invest in new sales and service personnel, however, we
anticipate that these expenses will decrease as a percentage of revenues in
future periods.
Pro forma selling, general and administrative expenses increased from $6.7
million for the six months ended January 31, 1998 to $7.4 million for the six
months ended January 31, 1999. The increased expense was due primarily to the
growth of the business and the hiring of additional sales personnel. These
expenses as a percentage of pro forma revenues decreased from 38.0% for the six
months ended January 31, 1998 to 30.5% for the six months ended January 31,
1999.
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<PAGE>
Research and Development. Research and development expenses consist primarily
of personnel and related expenses for our engineering staff and depreciation of
related equipment. Research and development expenses generally increased since
the quarter ended October 1997 due primarily to the hiring of additional
engineering personnel. We expect research and development expenses to continue
to increase in dollars and as a percentage of revenues in future periods as we
hire additional engineers to support our new product initiatives.
Pro forma research and development expenses increased from $1.0 million for the
six months ended January 31, 1998 to $1.6 million for the six months ended
January 31, 1999. The increased expense was due primarily to the hiring of
additional engineering personnel as well as additional equipment purchases.
These expenses as a percentage of pro forma revenues increased from 5.9% for
the six months ended January 31, 1998 to 6.5% for the six months ended January
31, 1999.
Amortization of Goodwill. Cortelco recorded $5.2 million of goodwill related to
the acquisition of BCS in April 1999 for the portion of BCS not previously
owned through common ownership. We are amortizing the goodwill over a 20-year
period from the date of acquisition and have reflected the amortization as
though the transaction was effective August 1, 1997 for purposes of our pro
forma presentation in the consolidated statement of operations data.
Management Fee. Management fee expense (income) consists primarily of
administrative expenses incurred by, or provided to, our former parent company
related to administrative services.
Minority Interest. Minority interest represents the minority stockholder's 45%
share of income in Longhai Telecommunications Equipment Co., Ltd. in China.
Cortelco acquired a 55% interest in Longhai in August 1997. Cortelco does not
currently anticipate investing in additional joint ventures in China. See note
9 to our consolidated financial statements.
Historical Results of Operations of Cortelco and Cortelco Systems Puerto Rico
Cortelco Systems Puerto Rico was merged with Cortelco in April 1999 and has
been recorded for all periods presented at historical costs and the financial
statements are presented on a consolidated basis for all historical periods. As
a result, the historical results of operations for the six months ended January
31, 1998 and 1999 and the fiscal years ended July 31, 1996, 1997 and 1998
represent the results of Cortelco Systems Puerto Rico and Cortelco and do not
reflect any of the operating results of BCS, or the pro forma adjusting entries
for the acquisition of BCS by Cortelco in April 1999.
Six Months Ended January 31, 1998 and 1999
Revenues. Total revenues increased 14.3% from $15.3 million for the six months
ended January 31, 1998 to $17.5 million for the six months ended January 31,
1999. The increase resulted primarily from increased sales of Millennium
systems to the U.S. government, increased sales of Cortelco Voice Processing
Systems and increased sales of third-party equipment in Puerto Rico. These
increases were partially offset by decreases in cellular airtime and cellular
telephone revenues in Puerto Rico in an effort to target higher quality
customers.
Cost of Revenues and Gross Profit. Gross profit increased 16.6% from $6.2
million for the six months ended January 31, 1998 to $7.2 million for the six
months ended January 31, 1999. The increase in gross profit was due primarily
to the growth in revenues. The gross margin was 40.2% for the six months ended
January 31, 1998 and 41.0% for the six months ended January 31, 1999.
Operating Expenses. Operating expenses increased 5.6% from $6.2 million for the
six months ended January 31, 1998 to $6.1 million for the six months ended
January 31, 1999. The increase was due primarily to the hiring of additional
engineering and sales personnel during the period. Operating expenses decreased
as a percentage of revenues from 38.1% for the six months ended January 31,
1998 to 35.0% for the six months ended January 31, 1999.
Years Ended July 31, 1996, 1997 and 1998
Revenues. Revenues were $38.5 million for the year ended July 31, 1996, $35.6
million for the year ended July 31, 1997 and $30.9 million for the year ended
July 31, 1998. The decrease from fiscal 1996 to fiscal 1997 resulted primarily
from phasing out our older analog product and decreases in cellular airtime and
cellular telephone revenues in Puerto Rico. The decrease from fiscal 1997 to
fiscal 1998 was due primarily to the decrease in cellular airtime and cellular
telephone revenues resulting from our decision to target higher quality
customers, the decrease in orders from our single largest customer due to
general economic instability in Southeast Asia, and the discontinuance of our
older analog product in fiscal 1998.
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<PAGE>
Cost of Revenues and Gross Profit. Gross profit was $11.8 million for the year
ended July 31, 1996, $11.5 million for the year ended July 31, 1997 and $12.4
million for the year ended July 31, 1998. The decrease in gross profit from
fiscal 1996 to fiscal 1997 was due primarily to the decrease in revenues. The
increase in gross profit from fiscal 1997 to fiscal 1998 was due primarily to
the increased sale of higher margin Millennium products such as the Cortelco
Voice Processing System. Gross margin was 30.6% for the year ended July 31,
1996, 32.2% for the year ended July 31, 1997, and 40.2% for the year ended July
31, 1998.
Operating Expenses. Operating expenses were $9.1 million for the year ended
July 31, 1996, $11.4 million for the year ended July 31, 1997 and $11.5 million
for the year ended July 31, 1998. Research and development expenses increased
during the periods due mainly to hiring of additional engineering personnel,
while selling, general and administrative expenses decreased during the year
ended July 31, 1998 due primarily to a decrease in administrative expenses
associated with the decreased cellular airtime and cellular telephone sales
during the year.
Discontinued Operations. Discontinued operations represent the results of
operations of a former subsidiary of Cortelco that was spun off in March 1997
to the stockholders of our former parent, merged with Business Communications
Systems, Inc. and renamed "BCS Technologies, Inc." At the time of spin-off, the
subsidiary had experienced substantial net losses and our former parent decided
to concentrate its focus on realizing the Millennium's business potential.
Liquidity and Capital Resources
We have funded our operations primarily through cash generated from operations,
periodic borrowings under our existing credit facilities, a $3.0 million
subordinated convertible note financing and acquisition financing provided by
Alcatel in connection with the purchase of our business from Alcatel in 1990.
Net cash provided by operating activities was $1.6 million for the year ended
July 31, 1996, $1.1 million for the year ended July 31, 1997, $1.1 million for
the year ended July 31, 1998, $1.3 million for the six months ended January 31,
1998 and $0.9 million for the six months ended January 31, 1999. Cash provided
by operating activities in fiscal 1997 and fiscal 1998 primarily resulted from
improved collection procedures implemented during these years. The decrease in
cash provided by operating activities for the six months ended January 31, 1999
was primarily attributable to increased accounts receivable, partially offset
by increased net income, decreased inventories and increased accounts payable.
Net cash used in investing activities was $0.5 million for the year ended July
31, 1996, $0.9 million for the year ended July 31, 1997, $0.2 million for the
year ended July 31, 1998, $0.2 million for the six months ended January 31,
1998 and $0.3 million for the six months ended January 31, 1999. In each year,
cash used in investing activities was primarily attributable to purchases of
equipment and, in fiscal 1997, to purchases of in-process technology. To the
extent that we continue to grow our research and development activities and
invest in new technologies in the future, we expect net cash used in investing
activities will increase.
Net cash used in financing activities was $1.1 million for the year ended July
31, 1996, $0.2 million for the year ended July 31, 1997, $1.1 million for the
year ended July 31, 1998, $1.3 million for the six months ended January 31,
1998 and $0.6 million for the six months ended January 31, 1999. Cash used in
financing activities in the year ended July 31, 1998 consisted primarily of a
decrease in outstanding checks, repayments under the revolving credit line and
partial repayment of a note to our former parent company, Cortelco Systems
Holding Corporation. The primary source of cash from financing activities in
the year ended July 31, 1997 was a $3.0 million subordinated convertible note
financing. See "Certain Transactions."
In July and August 1997, we entered into two credit facilities with Foothill
Capital which allows us to borrow up to an aggregate $9.0 million based on
accounts receivable and inventory levels. See note 11 to our consolidated
financial statements.
We believe that the proceeds from this offering, together with available funds,
anticipated cash flows from operations and our line of credit, will satisfy our
projected working capital and capital expenditure requirements for the
foreseeable future. To the extent that we grow more rapidly than expected in
the future, we may need additional cash to finance our operating and investing
activities.
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<PAGE>
Year 2000 Compliance
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year (the "Year 2000 Issue").
Computer programs that have such date-sensitive software may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
We are heavily dependent upon the proper functioning of our own computer or
data-dependent systems. This includes, but is not limited to, our systems in
information, business, finance, operations and service. Any failure or
malfunctioning on the part of these or other systems could adversely affect us
in ways that are not currently known, discernible, quantifiable or otherwise
anticipated by us.
Our operations are also dependent on the Year 2000 readiness of third parties
that do business with us. We are dependent on third-party suppliers of
infrastructure elements such as electric power and banking facilities. We do
not depend to any significant degree upon electronic transaction processing
with individual vendors for merchandise purchases, however, many of our
customers pay their invoices via electronic payment.
We have begun to evaluate those areas of our business that may be affected by
the Year 2000 Issue and have devised a plan to become Year 2000 compliant in a
timely manner which includes:
. assessment of our own computer systems and the products we sell
. communications with all our key suppliers, manufacturers and customers
to determine the extent to which we are vulnerable to their failure to
remedy their own Year 2000 Issues
. correction, upgrade, replacement or retirement of our computer systems
which are affected by the Year 2000 Issue
. testing for and validation of our Year 2000 compliance
. development of contingency plans to address situations that may result
if we are unable to achieve Year 2000 compliance of our critical
operations
Based on our assessment to date, we have determined that we will be required
to upgrade a portion of our software so that our computer systems will
function properly with respect to dates in the Year 2000 and thereafter. We
estimate that our information systems will be Year 2000 compliant by July
1999. We estimate that costs associated with the upgrade of existing computer
software will be less than $75,000. Costs incurred and expensed in the six
months ended January 31, 1999 were less than $25,000. These costs related
entirely to modifications of existing software and represented approximately
10% of our information systems budget for information technology in the
period. Of the remaining portion of our estimated Year 2000 costs,
approximately $30,000 of the costs will be incurred in the fiscal quarter
ending July 31, 1999. We may address non-critical Year 2000 Issues beyond the
Year 2000. There is no assurance that total costs will not exceed our
estimates.
We are in communications with key suppliers, manufacturers and customers to
determine the extent to which we will be vulnerable to such parties' failure
to remedy their own Year 2000 Issues. We currently have only limited
information on the Year 2000 compliance of our key suppliers, manufacturers
and customers. Our business and results of operations could experience
material adverse effects if our key suppliers or manufacturers were to
experience Year 2000 Issues that caused them to delay production or shipment
of key components or systems. In addition, our results of operations could be
materially adversely affected if any of our key customers encounter Year 2000
Issues that cause them to delay or cancel substantial purchase orders or
delivery of our product.
There can be no assurance that we will be able to upgrade any or all of our
major systems in accordance with our plan to address the Year 2000 Issue. In
addition, there can be no assurance that any such upgrades will effectively
address the Year 2000 Issue. If required upgrades are not completed or are
unsuccessful, there would be a material adverse impact on our operations.
Furthermore, there can be no guarantee that the systems of other companies on
which our own systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with our
systems, would not have a material adverse effect on us. We intend to, but
have not yet established a contingency plan detailing actions that will be
taken in the event that the assessment of the Year 2000 Issue is not
successfully completed on a timely basis. We believe that the worst case Year
2000 scenario would involve disruption in utilities, transportation, and
banking facilities.
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<PAGE>
Business
Cortelco designs, develops and markets integrated enterprise communications
systems for routing and controlling the voice, video and data communications of
businesses and other organizations. Our solutions are primarily designed for
enterprises with complex communications needs and small and medium-sized
telephony installations, typically between 25 to 500 communications ports. We
serve a range of vertical markets such as education, retail, government
agencies, emergency-911 services and catalog sales. Some of our customers have
multiple installations networked together and are as large as national retail
chains or multi-location branches of the U.S. government. Our customers include
Circuit City, U-Haul, the FAA, Bell Atlantic and Budget Rent-A-Car. Our
products are installed in over 7,100 locations worldwide. In addition to
selling our products, we also resell cellular airtime, cellular telephones and
third-party voice communications systems in Puerto Rico. Our products have won
numerous awards, including "Best of Show" awards at CT Expo in 1997 and 1998
and "Product of the Year" awards in 1997 and 1998 from Call Center magazine and
in 1999 from Call Center Solutions magazine. On a pro forma basis, our revenues
increased 36.9% from $17.7 million for the six months ended January 31, 1998 to
$24.2 million for the six months ended January 31, 1999.
Our communications systems are based on two platforms, the Millennium and the
DSP Series. Both platforms are based on flexible, modular hardware and software
architectures that are easy to configure. Our platforms support multi-site
networking and other advanced features such as dynamic call routing,
interactive voice response, voicemail and computer telephony integration. The
Millennium is a full-function routing and control system that primarily serves
customers averaging approximately 110 communications ports per installation and
addresses a broad range of voice, video and data communications requirements.
The Millennium also includes automatic call distribution features. The DSP
Series is primarily an advanced automatic call distribution system that also
includes a full-function routing and control system. The DSP Series is
typically used in installations requiring advanced computer telephony
integration applications such as those used in sophisticated call centers. The
architecture of our platforms is designed to permit easy configuration and
subsequent upgrading to meet changing customer needs. Customer desired features
can be incorporated through the installation of optional add-in cards and
software. Millennium systems can be connected over the public service telephone
network or private data networks and can support ISDN based systems such as
videoconferencing. Both the Millennium and the DSP Series interface with a
variety of popular third-party products through standard protocols.
We also offer other products to provide our customers with cost-effective,
integrated communications solutions. For example, the Cortelco Voice Processing
System offers integrated, multi-lingual voice and fax messaging services across
multiple networked locations. Our Illuminations software package enables self-
service access to databases, such as product pricing information or school
course registration options, using touch-tone telephones or the Internet. We
also offer software that organizes call center data into real-time,
customizable, graphical user interfaces and reports for agents and supervisors.
Industry Overview
According to Dataquest, the U.S. private branch exchange and call center
systems markets totaled $5.7 billion in 1998. Traditionally, the voice
switching requirements of large enterprises have been addressed by private
branch exchange equipment. Enterprises with smaller installations that have not
been able to justify the expense of private branch exchange equipment have
utilized key telephone systems that, while more economical, have limited
functionality and scalability. Technology advances and the demands of
increasingly sophisticated customers are driving changes in today's
telecommunications equipment industry. Businesses and organizations have come
to rely on complex voice and data networks to meet mission critical needs.
Recent technology advances have resulted in the introduction of increasingly
sophisticated features and applications in enterprise communications systems
that extend beyond traditional voice switching. Enterprises of all sizes are
now demanding telecommunications systems with the latest features and
applications in order to meet their business objectives. These features include
dynamic call routing, computer telephony integration, support for the
convergence of voice and data networks, multi-site networking and mobile
workforce support.
Dynamic Call Routing
Advanced call routing capabilities have recently been introduced that
dynamically screen, distribute and queue incoming calls based on specific
caller information, such as the number dialed or the state from which the call
is made. The growing number of "1-800" and "1-900" mail order, e-commerce and
customer support centers, driven by a focus on customer service, is generating
increased demand for dynamic call routing capabilities. These capabilities,
originally available only in dedicated automatic call distribution systems for
large stand-alone call centers, are now available as optional features on
21
<PAGE>
standard private branch exchange equipment, and are being used for more general
business applications in various departments, such as human resources and
customer support.
Computer Telephony Integration
Computer telephony integration is the combination of voice communication and
computing capabilities which link telephony equipment to voicemail servers,
telephone directories, customer information databases and PC applications.
Enterprises increasingly seek voice communications systems that can use
standard protocols to interface with numerous third-party computer
applications. Such integrated applications include interactive voice response,
call accounting and unified messaging. For example, computer telephony
integration applications can be used to personalize call handling based on a
customer database and other information provided from the business' data
network. When an incoming call is connected to the customer service agent,
pertinent information concerning the particular caller can be displayed on the
agent's monitor, enabling the agent to provide a prompt and informed response
to the customer.
Convergence of Voice and Data Networks
Advances in networking and computing technologies offer the prospect of
combining voice and data networks which until now have been built and operated
as separate networks. The ability to combine separate voice and data networks
into one converged network could improve functionality, reduce network
administration and provide cost savings. For example, the widespread
implementation of IP based data networks has led to the development of voice-
over-IP technology that permits transmission of voice communications over
public or private IP networks. According to Dataquest, transmission of voice
traffic over IP networks in smaller enterprises is projected to grow at a
compound annual growth rate of 313% to 18.8 billion minutes of use in 2000.
Multi-Site Networking
Enterprises are increasingly dependent on distributed voice and data networks
to support their operations across multiple locations. A networked voice
communications solution delivers voice communication functions across multiple
locations as an integrated system, thereby increasing productivity and user
convenience and reducing costs. For example, messaging can be centralized so
that voicemail, e-mail and faxes can be delivered seamlessly to all locations
across the network.
Support for a Mobile Workforce
Today's work environment is characterized by the need for real-time
communications that support increasingly mobile workers. Employees need to have
access to, and be accessible through, the enterprise's communications network
to make informed decisions quickly, improve productivity and respond to
customer needs rapidly. InfoTech Consulting estimates that the market for in-
building and campus wireless communications will grow by 67% from 2.4 million
users in 1999 to 4.0 million users in 2000. Remote access capabilities also
allow off-site workers to access all functions of the enterprise's
communications system as if they were on-site.
Traditional voice communications systems were designed to provide a broad range
of capabilities, but were not designed to be readily adaptable. Implementing
new features and applications on these systems often requires substantial
development effort and the purchase of ancillary equipment. Further
customization may be necessary to meet the needs of a particular installation.
Given the expense of ancillary equipment and customized development and the
need to allocate development resources to support larger customers,
communications systems vendors have generally addressed the small to medium-
sized installation segment of the market with equipment that is often costly
and less flexible. Thus, while traditional private branch exchange systems have
been able to adapt to the changing needs of large installations, the complexity
of these systems has limited the ability of traditional vendors to provide
flexible and cost-effective communications solutions for small and medium-sized
installations.
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The Cortelco Solution
Cortelco provides integrated communications systems flexible enough to meet the
immediate needs of enterprises with small to medium-sized installations, yet
scalable enough to accommodate these businesses and organizations as they grow.
Our systems are based on a general purpose bus architecture designed from the
outset to permit the dynamic addition and variation of inputs, outputs and
features through software and configuration of the system through add-in cards.
Our solution offers functionality previously not readily available or cost-
effective for small to medium-sized installations. Our communications platforms
provide advanced features at an affordable cost and without the need for
extensive specialized software and hardware or complex installation procedures.
The flexible architecture of our Millennium and DSP Series platforms is the
backbone for all of our products. Our comprehensive solutions are designed to
improve the productivity and efficiency of our customers by providing them with
a variety of communications capabilities, such as:
. advanced call routing allowing for dynamic distribution of incoming
voice, video and data traffic
. easy integration of voice communications and computing capabilities
. cost-effective multi-site networking
. advanced mobility features to provide in-building and campus wireless
communications and remote access by off-site workers
We believe that we have achieved significant advantages in the configurability
of and the ease of programming these capabilities and other new features
relative to many competitors. Our flexible core platforms and range of options
offer enterprises with small to medium-sized installations the combination of
features and functions that best suit their particular needs.
Strategy
Cortelco's objective is to provide comprehensive, cost-effective communications
systems for small and medium-sized installations in selected vertical markets.
Our strategy incorporates the following key elements:
Target Small to Medium-Sized Installations
We target enterprises with small to medium-sized installations, typically 25 to
500 communications ports, at one or more locations and that may have complex
communications needs. We focus our sales efforts on selected vertical markets
in which we have identified needs that can be especially well served by our
systems and are characterized by enterprises with small to medium-sized
installations, complex communications needs and cost-sensitivity. Our current
targeted vertical markets include education, retail, government agencies,
emergency-911 services and catalog sales. The inherent flexibility and
configurability of our Millennium and DSP Series platforms make us uniquely
suited to meet the needs of our targeted customers.
Provide Cost-Effective, Integrated Customer Solutions
We provide customers with cost-effective, integrated solutions for their voice
communications requirements, including solutions to seamlessly integrate their
voice and data networks. We believe our customers prefer to purchase integrated
solutions from a single vendor due to convenience, consistency of service, ease
of upgrade and vendor accountability. We offer an integrated family of
communications products that interface with a wide range of third-party
products through industry standard protocols, enabling us and our dealers to
configure and deliver complete, customized voice communications systems that
meet the specific needs of each customer.
Expand Distribution Capabilities
We are expanding both our direct sales force and our dealer network to more
aggressively pursue our target markets. Since March 31, 1998, we have increased
our sales force by approximately 48% from 25 to 37 and we plan further
increases over the next year. We believe our use of indirect sales channels is
especially effective because our dealers often have experience in our targeted
vertical markets and because our flexible platforms enable them to sell,
configure and service advanced features with relatively little expertise. As of
March 31, 1999, we had approximately 130 authorized dealers and value added
resellers. We are also expanding our geographic coverage by recruiting new
dealers, value added resellers and strategic partners in the United States, the
Caribbean and Latin America.
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Develop New Product Capabilities
We intend to continue to enhance our core product line and develop new features
and applications that leverage our existing Millennium and DSP Series
platforms, address emerging market needs and increase gross margins. For
example, we recently introduced new features and applications such as circuit
switched data capabilities for data intensive applications and PC-based phone
control. We expect to introduce several additional product capabilities during
1999, including:
. integrated in-building and campus wireless capabilities which increase
the range and maximum number of users on the existing Orbit Wireless
Communications product and add desktop equivalent capabilities
. unified messaging which provides integrated access to voice, fax and
e-mail messages in a multi-site networked communications system
. IP capabilities such as voice-over-IP, virtual private networks for
voice and data applications and other Internet-based applications
. Web-based virtual call center capabilities allowing agents and
supervisors located anywhere in the world to access their call centers
over the Internet
We are also developing our next generation automatic call distribution and
switching architecture to address the integration of emerging voice and data
communications technologies.
Products and Services
Cortelco offers the Millennium and the DSP Series, two feature-rich
communications platforms targeted at specific market segments. Each platform
provides advanced features that are easy to program and cost-effective due to
an innovative modular hardware design and flexible software. Both platforms
support multi-site networking and advanced features such as dynamic call
routing, interactive voice response, voicemail and computer telephony
integration. Our platforms share a suite of applications and hardware,
including voice processing systems, an in-building and campus wireless
communications system, a number of advanced computer telephony integration
products and digital handsets. Both platforms also interface to a range of
popular third-party products through standard protocols. These two
communications systems allow us to provide an integrated communications
solution for our target markets.
We also sell a variety of other products for use with our platforms. Our
Caribbean and Latin American Operations unit sells communications systems and
products produced by Cortelco and resells cellular airtime, cellular telephones
and third-party voice communications systems in Puerto Rico.
The Millennium
The Millennium is a fully-featured private branch exchange with automatic call
distribution capabilities, primarily targeting enterprises with small to
medium-sized installations. It can be expanded in a modular manner from 32 to
1,024 communications ports and supports up to 100 automatic call distribution
agents. Customers can increase the number of ports and add new features and
applications through the simple installation of add-in cards and software.
Dynamic call routing and control functions are provided by an integrated system
controller running a real-time operating system. PC-based applications and
system features are accessed via a serial interface. The Millennium can be
networked with Cortelco platforms at other sites via a digital network
interface.
The following is a diagram of the functional architecture of the Millennium
platform.
[Millennium Network Diagram]
24
<PAGE>
We believe that the Millennium platform is well-suited to address the voice
switching needs of enterprises with small to medium-sized installations,
including schools and school districts, retail sales and service locations,
distribution centers, broadcast and extended health care facilities, government
agencies and small call centers. The key strengths of the Millennium are multi-
site networking, affordable automatic call distribution applications and server
capabilities.
Multi-Site Networking. Millennium systems can be connected across multiple
locations, creating a private communications network that operates as if all
sites were on a single system. Therefore, connected locations can share the
Millennium's flexible call routing capabilities and applications. For example,
networked Millennium systems employing our proprietary VoiceClusters technology
can share a single Cortelco Voice Processing System, simplifying system
management and ensuring answering and call routing consistency across
locations. Similarly, networked Millennium systems employing the recently
announced integrated Orbit Wireless Communications System at each location
enables use of the same wireless handset across all locations.
Affordable Automatic Call Distribution Applications. A standard feature of the
Millennium is automatic call distribution. The system's dynamic call routing
and report generation capabilities can be enhanced with an optional, real-time
automatic call distribution package that provides call center management data
collection and reporting capabilities for smaller call centers. The Millennium
RealTime Automatic Call Distributor received a "Product of the Year" award from
Call Center Solutions magazine in January 1999.
Server Capabilities. The Millennium can be used to perform a variety of server-
like functions. For example, the Millennium can be used as a protocol converter
between E1 trunks, communications links used primarily by European carriers,
and T1 trunks, communications links used primarily in North America. The
Millennium can also be used as a channel bank, a device which merges multiple
voice and data circuits into a single digital communications stream, or act as
the switch in a wireless local loop network. In addition, one Millennium system
at the hub can serve as the single entry point for T1, PRI (Primary Rate ISDN)
and dedicated fiber optic links for the entire enterprise.
KEY FEATURES OF THE MILLENNIUM
- --------------------------------------------------------------------------------
Digital Switching Architecture
Networking and Server Capabilities
Automatic Call Distribution
. 32 to 1,024 .ISDN Support . Extensive Call Routing
Communications
Ports
.Multi-Site Networking . Real-Time Automatic Call
Distribution Agent
Reporting
. Modular Upgrade .Circuit Switched Data
Path
. Supports up to 100
. Software-Based Automatic Call
Configuration Distribution Agents
and Upgrades (typically between 20
and 50 agents)
. Personal Communications Service Access
.Fiber Remote Capability
.Communications Protocol Conversion
Telephony Features
.Channel Banking Illuminations Applications
. Integrated Suite
Voicemail
.Communications Hub
Unified Messaging
. Caller ID Support (available in 1999)
. In-building and Campus Wireless (Add-In available
in 1999)
. Auto Attendant
. Voice-over-IP Gateway (Add-In available in 1999)
. Interactive Voice
Response
. PC Attendant
Console
(Navigator)
. Computer Telephony
Integration Links
and Host Links
The DSP Series
The DSP Series is a fully-featured automatic call distributor platform with
integrated private branch exchange capabilities, primarily targeting the call
center market and enterprises with larger installations. It can be expanded in
a modular manner from 8 to 3,500 communications ports and supports up to 1,000
automatic call distribution agents. Its call routing flexibility can support up
to 32,000 routes, each with 64 different steps. Customers can increase the
number of ports and
25
<PAGE>
add new features and applications through the simple installation of add-in
cards and software. Dynamic call routing and control functions are provided by
redundant Pentium PCs running a real-time Unix-based operating system. PC-based
applications and system features are accessed via an integrated Ethernet LAN
interface. The DSP Series can be networked with Cortelco platforms at other
sites via a digital network interface.
The following is a diagram of the functional architecture of the DSP Series
platform.
[DSP Series Network Diagram]
Our DSP Series is primarily designed for call centers across a broad range of
industries including financial services, utilities, catalog sales, service
bureaus and emergency-911 services. The DSP Series is designed to ensure
uninterrupted service by including redundant processing units and power
supplies and using a real-time Unix-based operating system. We believe the DSP
Series is one of the most powerful and economical systems available on a cost-
per-agent basis. The DSP Series won "Best of Show" awards at the 1997 and 1998
CT Expo and "Product of the Year" awards in 1997 and 1998 from Call Center
magazine and in 1999 from Call Center Solutions magazine.
The DSP Series provides the platform to handle, manage and improve all aspects
of call center management. Its advanced automatic call distribution
capabilities include real-time dynamic call routing, skill-based routing,
simultaneous queuing among multiple gates and multiple networked systems,
intelligent messages and caller identification number directed routing. The DSP
Series also provides a comprehensive, customizable report and display package
and can support computer telephony integration applications for both inbound
and outbound call center solutions. We currently offer the DSP1000 and DSP2000.
The DSP2000 is an updated version of the DSP1000 which provides an upgrade path
to 3,500 communications ports and support for a greater number of call center
agents. The key strengths of the DSP Series are advanced automatic call
distribution capabilities, host computer telephony integration and PC Phone
Control with ActiveX.
Advanced Automatic Call Distribution Capabilities. The advanced automatic call
distribution capabilities of the DSP Series include:
. Home Agent--This feature allows an agent to call into the system from
a touch-tone phone, sign-on and conduct business as if he or she were
on-site. The home agent can perform all operations and enter all modes
as any other on-site agent. Supervisor displays, historical data
gathering and computer telephony integration applications work
identically for off-site and on-site agents. Additionally, the home
agent with a modem-connected PC can retrieve information from
enterprise databases.
. Automatic Agent Greetings (AgentVoice)--This feature allows an agent
to pre-record a number of different greetings that can be played based
upon a caller's identification number. The agent and the caller hear
the greeting simultaneously, providing a "whisper announce"
notification for the agent. Pre-recorded responses can be played on
demand to provide consistent, automated answers to frequently-asked
questions from callers. AgentVoice is particularly useful for high
volume call centers and service bureaus in which agents answer calls
for a variety of different businesses.
. Intelligent Announcement System--This feature enables our customers to
provide inbound callers with a number of customized delay,
promotional, informational, holiday, after hours and interactive
messages. In addition, it can provide the caller with real-time call
statistics such as estimated wait time, number of calls waiting and
number of agents available. Our customers can choose from a set of
pre-recorded voices or create a personalized message from a touch-tone
phone or a Microsoft Windows-based interface.
26
<PAGE>
. Agent Call Back--This feature allows a call center agent with
automatic number identification capability to flag a call, enabling a
caller who calls back within a given period of time to be routed to
the agent who originally handled the call.
Host Computer Telephony Integration. The DSP Series offers an applications
link for direct, redundant TCP/IP communications to host computers using
10/100BaseT Ethernet, a standard data networking protocol. This link allows
data and commands to flow between the DSP Series and multiple host computers,
permitting a networked implementation of a variety of enhanced applications
such as screen synchronization, automated outbound dialing, automatic number
identification screening and call routing. The link uses a standard Computer
Supported Telecommunications Application ("CSTA") protocol which functions with
many commercially available computer telephony integration protocols such as
Novell TSAPI, IBM Call Path and Dialogic CT Connect applications. Unlike other
similar competitive offerings, no intermediate computers are required for the
CSTA interface.
PC Phone Control with ActiveX. PC Phone Control is a graphical user interface
for agents to access call center functions such as available/unavailable
status, group pickup, redial and multi-line support. The ActiveX component of
our PC Phone Control provides tools for developers of call center applications
to use a variety of programming languages, including C, C++, Borland Delphi,
Visual Basic and Java, to develop custom applications without the need to
understand complex computer telephony integration protocols. We have won
numerous awards for this product, including a "Best of Show" award at the 1998
CT Expo and a "Product of the Year" award in 1997 from Call Center magazine.
KEY FEATURES OF THE DSP SERIES
- --------------------------------------------------------------------------------
Digital Switching Networking and Server Advanced Automatic
Architecture Capabilities Call Distribution
. 8 to 3,500 . Caller-ID Support .Skill-based Set
Communications Ports Routing
. Multi-Site Networking
. Modular Upgrade Path
. Automatic Agent
Greeting
(AgentVoice)
. Integrated In-building
. Software-Based and Campus Wireless
Configuration and (Add-In available in
Upgrades 2000)
.Intelligent
Announcement System
. Voice-over-IP Gateway
(Add-In available in
1999)
Telephony Features
.Agent Call Back
. Voicemail (Add-In)
.Agent Service
. ISDN Support Basic Automatic Call Observation
Distribution
. Auto Attendant . Redundant Power
. Extensive Call Routing Supplies and
Processing Units
. Interactive Voice
Response
. Real-Time Automatic
Call Distribution Agent . Multi-Site,
Reporting Networked Automatic
Call Distribution
Support
. Computer Telephony
Integration Links and
Host Links
. Remote/Home Agent
Client Application . Custom Automatic Call . Advanced Call Center
Computer Telephony Distribution Display Management Information
Integration Toolkit Packages System
Embedded SQL/ODBC Server PC Phone Control with . Supports up to 1,000
Active X Automatic Call
Distribution Agents
(typical number is
between 25 and 300
agents)
Redundant Embedded CSTA
Server
Other Products
We also offer a variety of other products for use with both the Millennium and
DSP Series.
Voice Processing System. The Cortelco Voice Processing System manages voice
and fax messaging through integration of the telephone and messaging systems.
This system provides a full range of voice and fax messaging services across
networks running Microsoft NT, Novell NetWare, IBM OS/2 Warp and Artisoft
LANtastic. Our proprietary VoiceClusters technology links multiple Cortelco
Voice Processing System servers into a global messaging system, using existing
wide-area networks to exchange messages between systems. This capability
enables voice and fax message distribution to locations worldwide, improving
message access and reducing transmission costs and delivery time. The system
offers
27
<PAGE>
capabilities to support multiple languages simultaneously and language
preference can be programmed by system, group or individual users. The Cortelco
Voice Processing System is expandable from 4 to 48 ports and supports voicemail
applications for up to 3,000 mailboxes, the Millennium and DSP Series platforms
and many other voice communications platforms.
In-building Wireless Communications. Cortelco's Orbit Wireless Communications
System utilizes micro-cellular technology in the 1.92 to 1.93 gigahertz
frequency band to provide a private digital wireless voice/data communications
network within a building or campus. The system consists of a controller, base
stations and user handsets and can be used with our systems or with any third-
party private branch exchange or key telephone system. These system components
are purchased and licensed from a third-party supplier under an OEM purchase
agreement. We recently announced a Millennium Wireless Services Card of our own
design which we expect to make available during the third quarter of 1999. This
add-in card and software enables full desktop equivalent features on the Orbit
wireless handsets and significantly increases the range of the system and
number of users it can simultaneously support. We plan to provide a similar
add-in card for the DSP Series. The Orbit Wireless Communications System won a
"Best of Show" award at the 1998 CT Expo.
Interactive Voice Response. Cortelco's Illuminations packages are Interactive
Voice Response and Web-enabled self-service information retrieval packages
customized for certain vertical markets. We released the first Illuminations
package, Illuminations for Education, in August 1998. Illuminations for
Education supports such common applications as automated course registration,
automated attendance validation and grade reporting. We are considering the
development of additional packages for the e-commerce, call center, broadcast
and retail markets.
PC-Based Attendant Console. The Navigator attendant console is a hardware and
software based answering and messaging package for use with our Millennium
system. The Navigator enhances an attendant's performance by presenting
appropriate answer phrases, associated company directories, current
availability status of individuals and other useful information with each
inbound call. Calls can be connected to desired parties, on- or off-site, with
a single keystroke or the click of a mouse. Messages can be taken for
unavailable parties or digital pagers can be dialed with preprogrammed callback
numbers displayed. The Navigator provides the attendant with the information
necessary to answer and process efficiently each call presented to the console.
The Navigator is particularly well-suited for multi-tenant applications. A new
version of this product, to be introduced in the third quarter of 1999,
provides the ability to integrate with popular e-mail packages such as
Microsoft Outlook. This product won a "Best of Show" award at the 1997 CT Expo.
Third-Party Products and Services in Puerto Rico
We resell cellular airtime, cellular telephones and third-party voice
communications systems in Puerto Rico. These third-party products include voice
communications systems from Hitachi and Lucent, sold under distributor
agreements for the Puerto Rico market. Cellular airtime services are resold
under agreements with CellularOne and GTE and cellular telephone equipment is
resold for a variety of equipment suppliers, including Ericsson, Motorola and
Nokia.
Customers
Cortelco's customers are typically enterprises with small to medium-sized
installations which often have complex communications needs. Many of these
customers are in selected vertical markets in which we have identified needs
that can be especially well served by our systems. These markets currently
include education, retail, government agencies, emergency-911 services and
catalog sales. Some of our customers have multiple installations networked
together and are as large as national retail chains, such as Circuit City and
U-Haul, or multi-location branches of the U.S. government, such as the FAA and
the U.S. Coast Guard.
For example, Circuit City, one of the nation's largest retailers of brand-name
consumer electronics equipment, has implemented our products in several hundred
stores throughout the United States. Circuit City's customer service centers
use the Millennium Real-Time Automatic Call Distributor package. The
Millennium's flexible call routing and automatic call distributor capabilities
and its easy installation, programming and setup were important factors for
Circuit City in choosing a Cortelco solution.
We have also sold over sixty DSP Series systems to the FAA for use in their
Automated Flight Service Stations. Whenever a general aviation pilot files a
flight plan, checks aviation weather or national airspace information, the call
is answered and routed through a DSP Series system. The DSP Series provides the
FAA with an automatic call distribution platform for applications such as
computer telephony integration, skill-based call routing and remote agents, as
well as full voice routing and control functionality.
28
<PAGE>
Our products have been installed for over 5,400 customers in over 7,100
locations. We believe the following list of customers is typical of our
customer base by virtue of the industries they represent and the types of
applications they implement using our products:
Retail Sales and Service Education
Circuit City Budget Rent-A-Car
U-Haul Walt Disney's Celebration
Hartz Mountain School
Budget Rent-A-Car St. Cloud, Minnesota
School District
Media/Entertainment Pennsylvania State School
Los Angeles Dodgers Systems
Punch Productions Washington University
Trinity Productions Universidad Politechnica
Penske Motorsports Cali-
fornia Speedway General Business
WGBH/KQED Florida Power
Island Finance
Call Centers Consolidated Freightways
Whistler Resorts Comair (Delta)
Birkenstock Shoes Baxter Caribe
Bell South (emergency-911)
Bell Atlantic (emergency- Government Agencies
911) Federal Aviation Adminis-
Bellco Federal Credit tration
Union National Park Service
California Highway Patrol U.S. Coast Guard
Current, Inc. U.S. Customs Service
U.S. Marshals Service
Sales and Marketing
For the fiscal year ended 1998, approximately 70% of our pro forma revenues
were generated by our direct distribution channels and approximately 30% of our
pro forma revenues were generated by our indirect distribution channels. We use
a direct sales force to market our Millennium systems to national accounts and
the federal government and for all DSP Series system sales. Approximately 130
authorized dealers and value added resellers sell, install and service our
Millennium systems. We directly install, maintain and support our DSP Series
systems. All of our sales in Puerto Rico are made through our direct sales
force. We also offer systems integration services and customized system
development. As of March 31, 1999, we had approximately 71 sales and marketing
personnel. We have increased the number of sales and marketing personnel by
approximately 43% since 1998 and anticipate further increases in the future.
Through our office in San Juan, Puerto Rico, our Caribbean and Latin American
Operations unit expects to develop a network of authorized dealers for sales
and service of the Millennium and DSP Series product lines in countries in the
Caribbean, Central America and the northern portion of South America.
Additionally, we expect to open an office in Santiago, Chile, which will
develop and manage a network of authorized dealers for sales and service in
Chile, Ecuador, Peru, Bolivia and Argentina.
Our marketing efforts focus on building brand awareness and increasing sales to
customers directly and through our dealer network and value added resellers. We
seek to educate customers in our targeted vertical markets about the benefits
of our flexible product platforms and integrated communications solutions and
the quality of our customer support and services.
Research and Development
Our research and development efforts focus on enhancing our core product lines
and developing the next generation automatic call distribution and switching
architecture. We routinely conduct market research and solicit input from our
customers and a select set of dealers as an integral part of our product
planning. Current product initiatives include:
. Platform Extensions--Extend and enhance the capabilities of the
Millennium and DSP Series platforms. Examples include: unified
messaging support, enhanced integration of our Cortelco Voice
Processing System, an Orbit Wireless Services Card for the DSP Series
and 2-wire telephone support for the Millennium.
. Internet-Based Products--Integrate Internet capabilities into
traditional switched telephony applications. Examples include: voice-
over-IP and Web-based virtual call center capabilities.
29
<PAGE>
. Computer Telephony Integration Applications--Extend programming
interfaces, develop applications and certify third-party computer
telephony integration products for targeted vertical markets. Examples
include: TAPI standard computer telephony integration interface,
Illuminations packages for call centers and retail markets and
enhanced PC Phone Control with ActiveX.
. Next Generation Core Products--Establish design concepts and
architecture for new core products that will extend and enhance the
capabilities of our current Millennium and DSP Series products.
Consistent with our strategy, new core products will be based on an
open architecture, will support a broader set of industry standard
protocols than our current products and will more fully integrate
emerging voice and data technologies. Examples of the new technologies
and capabilities we are addressing include: a local area network
telephony gateway, an IP-based dynamic call routing server for voice
and data, frame relay and asynchronous transfer mode protocol support,
and local area network-based IP telephones.
As of March 31, 1999, we had 29 employees engaged in research and development.
We have increased the total number of engineers by approximately 21% since
1998. We expect to continue to increase the number of our research and
development employees at a faster rate than other areas and to focus these
additional resources on our new product development initiatives. In particular,
we will expand our capability to design and develop new software features which
are based on industry standard network interfaces, such as asynchronous
transfer mode and frame relay, and industry standard operating systems, such as
Unix and Windows NT.
Manufacturing
We currently rely on two contract electronic manufacturers to produce the
Millennium, CMC Industries in Corinth, Mississippi and Pensar Corporation in
Appleton, Wisconsin. Both contract manufacturers perform printed circuit board
assembly and soldering, in-circuit and functional testing and packaging. We
believe that CMC and Pensar have sufficient capacity and technical capabilities
to respond to foreseeable increases in customer demand and advances in in-
process technology. After final assembly by either manufacturer, we inspect and
perform quality assurance testing at our facility in Corinth, Mississippi prior
to shipment to our dealers or customers.
Due to the custom nature of call center installations, each DSP Series system
is custom-configured at our facility in Kennesaw, Georgia. We use various con-
tract electronic manufacturers to manufacture line cards, trunk cards and other
DSP Series components and subassemblies. We receive, inspect and test compo-
nents and subassemblies at our Kennesaw facility. We then assemble and test
each DSP Series system, configured in accordance with the customer's order, and
ship the product directly to the customer's site.
We are dependent on certain key suppliers for a number of our product compo-
nents. For example, we rely on Siemens for our primary digital signal proces-
sors and chip sets and CTP Systems for our Orbit wireless handsets and base
stations. Our contract electronic manufacturers use standard components and
subassemblies manufactured to our specifications. See "Risk Factors--We Depend
on a Single Source of Supply for Some Components."
Competition
Our principal competitors include Lucent Technologies, Mitel, NEC, Nortel
Networks and Siemens in the voice communications equipment market. In addition
to the foregoing companies, we compete with Aspect Telecommunications and
Rockwell Electronic Commerce in the call center market. We also compete with
vendors in markets for our ancillary products, such as voicemail, wireless
communications and computer telephony integration applications. As voice and
data communications networks converge, data equipment vendors such as Cisco
Systems and 3Com may also compete in our market. In addition, alliances and
mergers between telecommunications and computer companies may strengthen our
competitors' positions or result in new entrants into our market.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, customer service and other resources, greater
name recognition and a larger installed customer base than we do. As a result,
our competitors may be able to respond to new or emerging technologies and
changes faster than we can. They may also be able to devote greater resources
to the development, promotion and sale of their products. Actions by our
competitors could result in price reductions, reduced margins and loss of
market share, any of which would have a material adverse effect on our
financial condition. There can be no assurance that we can compete successfully
against our competitors or that competitive pressures would not have a material
adverse effect on our financial condition and results of operations.
30
<PAGE>
Intellectual Property
Cortelco relies on patent, trademark, copyright, trade secret protection and
confidentiality and license agreements with its employees, clients, partners
and others to protect its proprietary rights. We currently have 23 patents is-
sued in the United States and additional patents pending. There can be no as-
surance that any patent applications now pending or hereafter filed by Cortelco
will result in patents being issued.
The patent position of technology companies involves complex legal and factual
questions and, therefore, their validity and enforceability cannot be predicted
with certainty. There can be no assurance that the steps taken by Cortelco to
protect its proprietary rights will be adequate or that third parties will not
infringe or misappropriate our patents, trade secrets, trademarks and similar
proprietary rights. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology devel-
oped by Cortelco.
A failure by Cortelco to protect its intellectual property could have a
material adverse effect on its business, financial condition and results of
operations. In addition, litigation may be necessary in the future to enforce
our intellectual property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of management and technical
resources, which could have a material adverse effect on our business,
financial condition and results of operations.
"BCS Technologies," "DSP1000," "Millennium," "DSP2000," "Illuminations," "Navi-
gator," "Orbit," "VoiceClusters" and the Cortelco logo are trademarks of
Cortelco.
Facilities
We currently lease the following facilities:
. Memphis, Tennessee--approximately 22,000 square feet of office space
for our corporate headquarters as well as administration, sales and
marketing, customer support and Millennium engineering departments
. Kennesaw, Georgia--approximately 23,000 square feet of office space
for our DSP Series engineering, manufacturing operations and quality
assurance departments
. San Juan, Puerto Rico--approximately 15,000 square feet of office
space for our Caribbean and Latin American Operations unit
. Corinth, Mississippi--approximately 11,000 square feet of warehouse
space for our Millennium manufacturing operations and quality
assurance departments
. Englewood, Colorado--approximately 7,000 square feet of office space
for ACD Business Operations unit sales and marketing and customer
support departments
. Guelph, Ontario, Canada--approximately 5,000 square feet of office
space for a software engineering group
We expect to relocate our headquarters to a larger facility in Memphis, Tennes-
see in 2000. We believe that these facilities will be adequate to accommodate
our needs for the foreseeable future.
Employees
As of March 31, 1999, we employed approximately 230 people, including
approximately 71 in sales and marketing, approximately 29 in research and
development, approximately 68 in service, technical support and training,
approximately 24 in manufacturing operations and quality assurance and
approximately 38 in finance and administration. We also employ independent
contractors and other temporary employees. None of our employees is represented
by a labor union, and we consider our employee relations to be good.
Competition for qualified personnel in our industry is intense, particularly
for qualified service technicians and software engineers trained in computer
telephony integration and other technical staff. We believe that our future
success will depend in part on our ability to attract, hire and retain
qualified personnel.
Legal Proceedings
In the ordinary course of our business, we may from time to time be involved in
litigation with employees, customers and others. In July 1998, we were served
with a complaint by CBC Distribution & Marketing, Inc., ("CDM"), alleging
essentially that a Millennium system purchased by CDM failed to function as
represented. The complaint, which also named our dealer, Technicom
Communications, Inc., and CDM's insurance carrier as defendants, seeks actual
damages of approximately $1.5 million due to disruption of its fantasy football
pool operations plus punitive damages and attorneys'
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<PAGE>
fees. CDM later amended the complaint to add Sprint International Communica-
tions as a defendant. CDM's insurance carrier also filed a cross-claim against
us. CDM's claim against its insurance carrier and the insurance carrier's
cross-claim against us have since been voluntarily dismissed. We believe that
this litigation is without merit and will not have a material adverse effect on
our business.
In addition, in November 1998, WSI, Inc., as debtor in possession in a chapter
XI bankruptcy proceeding, filed an action against Cortelco Puerto Rico,
Cortelco Systems Holding Corporation and David S. Lee, one of our directors, in
bankruptcy court. WSI is a distributor of telecommunications systems in Puerto
Rico. The complaint essentially alleges that the defendants misused
confidential information and otherwise engaged in unfair competition with WSI
by attempting to discredit WSI with Lucent Technologies, Inc. and WSI's
customers in Puerto Rico and to hire WSI employees. The complaint seeks damages
in excess of $15.0 million plus costs and attorneys' fees. We believe that this
litigation is without merit and will not have a material adverse effect on our
business.
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<PAGE>
Management
Executive Officers and Directors
The executive officers and directors of Cortelco, and their ages as of April
15, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------- --- -------------------------------------------------------------------------
<S> <C> <C>
J. Michael O'Dell 50 President, Chief Executive Officer and Director
Stephen N. Samp 34 Chief Financial Officer, Vice President of Finance and Administration and
Secretary
Robert R. Cash 44 Vice President of Sales and Marketing
David M. Fredrick 46 Vice President/General Manager of ACD Business Operations
Sergio R. Moren 54 Vice President/General Manager of Caribbean and Latin American Operations
David S. Lee (1) 61 Chairman of the Board
Stephen R. Bowling 56 Director
(1) (2)
Robert P. Dilworth 54 Director
(2)
W. Frank King (1) 59 Director
Jenny Hsui Theleen 47 Director
(1) (2)
</TABLE>
- -------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
J. Michael O'Dell has served as Chief Executive Officer and a director of
Cortelco since April 1998 and as President since October 1997. He also served
as Chief Operating Officer of Cortelco from October 1997 to April 1998. From
May 1993 to October 1997, Mr. O'Dell held various management positions at VTEL
Corporation, a visual communications company, the most recent being Vice
President and General Manager for the Enterprise Systems Division. Prior to
VTEL, Mr. O'Dell served as Vice President, PC Products at Dell Computer
Corporation, a personal computer manufacturer, and in various management
capacities at IBM Corporation, a computer and electronics company. Mr. O'Dell
received an M.S. in computer science from the United States Naval Postgraduate
School and a B.S. from the United States Naval Academy in Annapolis, Maryland.
Stephen N. Samp has served as Chief Financial Officer, Vice President of
Finance and Administration and Secretary of Cortelco since March 1998. From
June 1995 to February 1998, Mr. Samp was Vice President, Controller and Chief
Accounting Officer at Guardsmark, Inc., a private security services firm. Mr.
Samp previously worked with Deloitte, Haskins & Sells, an accounting firm. From
August 1993 to May 1995, Mr. Samp attended the Wharton Graduate School of
Business at the University of Pennsylvania where he earned an M.B.A. Mr. Samp
received a B.S. in business administration from the Ohio State University.
Robert R. Cash has served as Vice President of Sales and Marketing for Cortelco
since March 1998. From June 1996 to March 1998, he was Senior Vice President at
Coherent Communications Systems Corporation, a telephone apparatus company.
From 1991 to 1994, Mr. Cash served as Vice President of Consumer Products and
Vice President and General Manager for the Wireless Terminal Strategic Business
Unit, a division of AT&T, a telecommunications company. He also has experience
as New Business Development Vice President, as well as Product Manager,
responsible for Key System Products at AT&T General Business Systems. Mr. Cash
received an M.B.A. from Rutgers University and a B.A. in accounting from
Lipscomb University.
David M. Fredrick has served as Vice President/General Manager of ACD Business
Operations since April 1999. From 1988 until BCS was acquired by Cortelco in
April 1999, Mr. Fredrick served as President and a director of BCS and its
predecessor. Prior to BCS, Mr. Fredrick served as Vice President and Chief
Operating Officer of Big O Tire Dealers and a consultant for a healthcare
franchise company. Mr. Fredrick received an M.B.A. and a B.A. in business
administration from the University of Denver.
Sergio R. Moren has served as Vice President/General Manager of Caribbean and
Latin American Operations since April 1999. Mr. Moren joined Cortelco Systems
Puerto Rico in February 1998 and served as its President until it merged with
Cortelco in April 1999. He joined Cortelco from Integrated Technologies, a
contract manufacturer in the Dominican Republic, where he was Vice President
from January 1996 to February 1998. Mr. Moren has also held a number of
executive manufacturing and sales and marketing positions with various
companies, including ITT Industries, Inc. in Puerto Rico and Latin America,
where he last held the position of President and General Manager of ITT Qume
Caribe, Puerto Rico. Mr. Moren received a masters degree from Harvard
University's program for management development and a B.S. in electrical
engineering from Santa Maria University in Chile.
33
<PAGE>
David S. Lee has served as the Chairman of Cortelco since 1991. Mr. Lee also
serves as a director of CMC Industries, Inc., a telecommunications equipment
manufacturer; Photonics Corporation, a computer communications equipment
company; Centigram Communications Corporation, a communications management
system company; and Linear Technology Corporation, a semiconductor company. Mr.
Lee is a private investor and also serves as a Regent of the University of
California. Mr. Lee was the President and Chairman of Data Technology
Corporation from 1985 to 1988. Previously he served as Group Executive and
Chairman of the Business Information Systems Group of ITT Corporation, and
President of ITT Qume, formerly Qume Corporation. Mr. Lee co-founded Qume
Corporation in 1973 and served as Executive Vice President until the company
was acquired by ITT in 1978. Mr. Lee received an M.S. in mechanical engineering
from North Dakota State University. Mr. Lee received a B.S. in mechanical
engineering and an honorary doctorate of engineering from Montana State
University.
Stephen R. Bowling has served on the board of directors of Cortelco since
September 1993. From 1994 to October 1997, he was the President of Cortelco
and, from 1994 to April 1998, he was the Chief Executive Officer of Cortelco.
Mr. Bowling is a private investor and since September 1993, he has served as
President, Chief Executive Officer and a director of Cortelco Systems Holding
Corporation. From 1978 to 1984, Mr. Bowling held several executive positions
with Qume Corporation, a computer systems peripherals company, where his last
position was Executive Vice President and General Manager. Mr. Bowling received
an M.B.A. from Stanford University and a B.A. in economics from Williams
College.
Robert P. Dilworth has served on the board of directors of Cortelco since July
1998. He is presently serving as Senior Vice President of the Computer and
Consumer Products Group at VLSI Technology, Inc., a semiconductor manufacturer,
where he also previously served as a director. Mr. Dilworth is also presently
serving as the Chairman of Metricom, Inc., a wireless data communications
company, and served as its President from 1987 to 1997, and its Chief Executive
Officer from 1987 to 1998. Mr. Dilworth is a director of Photonics Corporation,
a computer communications equipment company. Mr. Dilworth received a B.S. in
business administration from Los Angeles State University.
W. Frank King has served on the board of directors of Cortelco since September
1998. He is currently a private investor and a director of PSW Technologies,
Inc., a software integration consulting firm, where he served as President and
Chief Executive Officer from 1992 to 1998. He currently serves on the boards of
directors of Excalibur Technologies Corporation, a software company; Auspex
Systems Inc., a computer server manufacturer; and Natural Microsystems
Corporation, a telecommunications company. Dr. King earned a Ph.D. in
electrical engineering from Princeton University, an M.S. in electrical
engineering from Stanford University and a B.S. in electrical engineering from
the University of Florida.
Jenny Hsui Theleen has served on the board of directors of Cortelco since July
1997. She is currently serving as the Chairman of CV Transportation Services,
an integrated transportation and distribution company. In 1984, Ms. Theleen co-
founded ChinaVest, a private equity investment firm, and presently serves as a
managing director. Ms. Theleen earned her post-graduate degree from L'Institut
d'Etudes Politiques in Paris, France, and a bachelor's degree from the
University of Singapore.
Committees of the Board of Directors
Our board of directors consists of six members, including our Chief Executive
Officer. In accordance with the terms of our certificate of incorporation, the
terms of office of the board of directors will be divided into three classes:
Class I, whose term will expire at the annual meeting of stockholders to be
held in 2000, Class II, whose term will expire at the annual meeting of
stockholders to be held in 2001, and Class III, whose term will expire at the
annual meeting of stockholders to be held in 2002. The Class I directors are
Stephen R. Bowling and Jenny Hsui Theleen, the Class II directors are Robert P.
Dilworth and David S. Lee, and the Class III directors are W. Frank King and J.
Michael O'Dell. At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms will then expire will
be elected to serve from the time of election and qualification until the third
annual meeting following election. Any additional directorships resulting from
an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors.
Our board of directors has established an audit committee and a compensation
committee. The audit committee consists of independent directors Stephen R.
Bowling, Robert P. Dilworth and Jenny Hsui Theleen. The audit committee makes
recommendations to the board regarding the selection of independent auditors,
reviews the results and scope of the audit and other services provided by the
Cortelco's independent auditors, and reviews and evaluates Cortelco's audit and
control functions. The compensation committee consists of Stephen R. Bowling,
W. Frank King, David S. Lee and Jenny Hsui Theleen.
34
<PAGE>
Director Compensation
Directors currently do not receive any cash compensation for services provided
as a board member but are reimbursed for out-of-pocket expenses they incur in
connection with attendance at board meetings. Pursuant to the 1997 Equity
Incentive Plan, Robert P. Dilworth and W. Frank King were each granted an
option to purchase 18,000 shares of common stock at an exercise price of $0.70
per share in July 1998 and September 1998, respectively, and an option to
purchase 17,027 shares of common stock at an exercise price of $6.50 per share
in December 1998. Directors are eligible to receive discretionary option grants
pursuant to the 1999 Equity Incentive Plan and employee directors will also be
eligible to participate in the 1999 Employee Stock Purchase Plan. See "--Stock
Incentive Plans."
Compensation Committee Interlocks and Insider Participation
In April 1998, our board of directors established a compensation committee. The
compensation committee is responsible for approving all compensation
arrangements for our officers and for administering our employee stock option
and stock purchase plans. In the last fiscal year, the compensation committee
was composed of Stephen R. Bowling, David S. Lee and Jenny Hsui Theleen. W.
Frank King joined the compensation committee in February 1999. Other than
Stephen R. Bowling, who served as Cortelco's President from 1994 to October
1997 and as Cortelco's Chief Executive Officer from 1994 to April 1998, none of
the members of the compensation committee are, or have ever been, officers or
employees of Cortelco. Prior to the formation of the compensation committee,
all decisions regarding compensation arrangements for our officers were made by
the board of directors. See "Certain Transactions."
Executive Compensation
The following table sets forth certain information concerning the compensation
earned for the fiscal year ended July 31, 1998 for (a) Cortelco's Chief
Executive Officer and (b) each other executive officer of Cortelco whose total
salary and bonus exceeded $100,000 for services rendered to Cortelco and its
subsidiaries during the fiscal year 1998 (the "Named Executive Officers"). For
information regarding terms of the stock options, see "--Stock Incentive
Plans."
Summary Compensation Table
<TABLE>
<CAPTION>
-------------------------
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying
Name and Principal Position (1) Salary Options
- ------------------------------- ------------ ------------
<S> <C> <C>
J. Michael O'Dell (2)................................ $156,153 85,000
Stephen R. Bowling (3)............................... 140,000 --
</TABLE>
- -------------------
(1) The annual compensation of each of Robert R. Cash, David M. Fredrick and
Sergio R. Moren exceeds $100,000. However, because each of the above
individuals were hired during fiscal year 1998, their total compensation
earned as of the end of fiscal year 1998 did not exceed $100,000 and
therefore they are not included as Named Executive Officers.
(2) J. Michael O'Dell joined Cortelco as President and Chief Operating Officer
in October 1997 and became the Chief Executive Officer of Cortelco in April
1998.
(3) Stephen R. Bowling previously served as President of Cortelco until October
1997 and Chief Executive Officer until April 1998.
35
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Individual Grants
-------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Option Term (3)
------------------------------
Percentage
Number of of Total
Securities Options
Underlying Granted in Exercise
Options Fiscal Price Expiration
Name Granted(1) 1998(2) Per Share Date 5% 10%
- ---- ---------- ---------- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
J. Michael O'Dell....... 85,000 61.0% $1.00 10/15/07 $ 53,456 $ 135,468
Stephen R. Bowling...... -- -- -- -- -- --
</TABLE>
The following table sets forth each grant of stock options made during the
fiscal year ended July 31, 1998 to each of the Named Executive Officers:
- -------------------
(1) Options generally vest at a rate of 12.5% on the date six months after the
vesting commencement date and the remaining options vest in equal
installments on a monthly basis over a three and one-half year period
thereafter. These options have a term of 10 years.
(2) Based on an aggregate of 139,311 shares subject to options granted to
employees of Cortelco under the 1997 Equity Incentive Plan in fiscal 1998,
including the Named Executive Officers.
(3) The potential realizable value is calculated based on the term of the
option at the time of grant, which is 10 years. Stock price appreciation of
5% and 10% is assumed pursuant to rules promulgated by the SEC and does not
represent our prediction of our stock price performance. The potential
realizable value at 5% and 10% appreciation is calculated by assuming that
the exercise price on the date of grant appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price.
Aggregated Options Exercised in Fiscal 1998 and Year-End Option Values
The following table sets forth, for the Named Executive Officers, the shares
acquired and the value realized on each exercise of stock options during the
year ended July 31, 1998, and the number and value of securities underlying
unexercised options held by the Named Executive Officers at July 31, 1998:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options (1) In-The-Money Options (2)
Acquired Value ---------------------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- -------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Michael O'Dell....... -- -- -- 85,000 -- --
Stephen R. Bowling...... -- -- -- -- -- --
</TABLE>
- -------------------
(1) Options generally vest at a rate of 12.5% on the date six months after the
date of grant and the remaining options vest in equal installments on a
monthly basis over a three and one-half year period thereafter. These
options have a term of 10 years.
(2) There was no public trading market for the common stock as of April 15,
1999. Accordingly, these values have been calculated based on the initial
offering price as set forth on the cover page of this prospectus.
Stock Incentive Plans
1999 Equity Incentive Plan
In April 1999, our board of directors adopted, and the stockholders approved,
the 1999 Equity Incentive Plan (the "1999 Incentive Plan"). There is currently
an aggregate of 2,000,000 shares of common stock authorized for issuance under
the 1999 Incentive Plan. The 1999 Incentive Plan provides for the grant of
incentive stock options, as defined under the Internal Revenue Code of 1986, as
amended (the "Code"), to employees and nonstatutory stock options, restricted
stock purchase awards, stock bonuses and stock appreciation rights to
employees, directors and consultants of Cortelco and its affiliates. The 1999
Incentive Plan is administered by a committee appointed by the board of
directors which determines recipients and types of awards to be granted,
including the exercise price, the number of shares subject to the award, the
vesting rate and the exercisability of awards.
The terms of options granted under the 1999 Incentive Plan may not exceed 10
years. The exercise price is determined by the board of directors, provided
that, the exercise price for an incentive stock option cannot be less than 100%
of the fair market value of the common stock on the date of the option grant,
and the exercise price for a nonstatutory stock option
36
<PAGE>
cannot be less than 85% of the fair market value of the common stock on the
date of the option grant. Generally, the optionee may not transfer a stock
option other than by will or the laws of descent or distribution unless the
optionee holds a nonstatutory stock option that provides for transfer in the
stock option agreement. However, an optionee may designate a beneficiary who
may exercise the option following the optionee's death. An optionee whose
service relationship with Cortelco or any affiliate ceases for any reason may
exercise vested options for the term provided in the option agreement.
No incentive stock option may be granted to any person who, at the time of the
grant, owns, or is deemed to own, stock possessing more than 10% of the total
combined voting power of Cortelco or any affiliate of Cortelco, unless the
option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant and the term of the option does not
exceed five years from the date of grant. In addition, the aggregate fair
market value, determined at the time of grant, of the shares of common stock
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year, under all Cortelco stock plans
and its affiliates, may not exceed $100,000.
When Cortelco becomes subject to Section 162(m) of the Code, which denies a
deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000, no person may be granted options under the 1999 Incentive
Plan covering more than 500,000 shares of common stock in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the 1999 Incentive Plan. Restricted stock purchase awards granted
under the 1999 Incentive Plan may be granted pursuant to a repurchase option in
favor of Cortelco in accordance with a vesting schedule and at a price
determined by the board of directors. Stock bonuses may be awarded in
consideration of past services without a purchase payment. Unless otherwise
specified, rights under a stock bonus or restricted stock bonus agreement
generally may not be transferred other than by will or the laws of descent and
distribution during such period as the stock awarded pursuant to such an
agreement remains subject to the agreement.
If there is any sale of substantially all of Cortelco's assets, any merger,
reverse merger or any consolidation in which Cortelco is not the surviving
corporation, or any acquisition by certain persons, entities or groups of 50%
or more of Cortelco's stock, all outstanding awards under the 1999 Incentive
Plan either will be assumed or substituted by any surviving entity. If the
surviving entity determines not to assume or substitute such awards, the
vesting provisions of such stock awards will be accelerated and the awards
terminated if not exercised prior to the such transaction.
As of April 15, 1999, no stock bonuses or restricted stock awards had been
granted, options to purchase 270,000 shares of common stock were outstanding,
no options have been exercised and 1,730,000 shares remained available for
future grants pursuant to the 1999 Incentive Plan. The 1999 Incentive Plan will
terminate in April 2009.
1997 Equity Incentive Plan
In April 1998, our board of directors and stockholders approved the 1997 Stock
Incentive Plan (the "1997 Incentive Plan"), which provides for the grant of
incentive stock options, nonqualified stock options and restricted stock awards
to employees and consultants. A maximum of 450,000 shares of common stock have
been reserved for issuance under the 1997 Incentive Plan. In addition, the
aggregate fair market value, determined at the time of grant, of the shares of
common stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year, under all stock plans
of Cortelco and its affiliates, may not exceed $100,000.
The 1997 Incentive Plan is administered by the board of directors, which has
the authority to determine which eligible individuals are to receive options or
restricted stock awards, the terms of such options or awards, the status of
such options as incentive or nonqualified stock options under the federal
income tax laws, including the number of shares, exercise or purchase prices
and exercisability, vesting schedule and the time, manner and form of payment
upon exercise of an option. The exercise price of options granted under the
1997 Incentive Plan is determined by the compensation committee. The options
expire after a specified period that may not exceed ten years or in the case of
a stockholder holding greater than 10% of the voting power, five years. As of
April 15, 1999, options to purchase 333,826 shares were outstanding, no options
had been exercised, and 116,174 shares remained available for future grants
pursuant to the 1997 Incentive Plan. The 1997 Incentive Plan will terminate in
April 2008. Our board of directors has determined that no further options will
be granted under the 1997 Incentive Plan after the completion of this offering.
1997 Equity Incentive Plan of BCS Technologies, Inc.
In April 1999, in connection with the acquisition of BCS, we assumed the 1997
Stock Incentive Plan of BCS, (the "BCS 1997 Incentive Plan"), which provides
for the grant of incentive stock options, nonqualified stock options and
37
<PAGE>
restricted stock awards to employees and consultants. A maximum of 96,495
shares of our common stock have been reserved for issuance under the BCS 1997
Incentive Plan. As of April 15, 1999, options to purchase 94,279 shares were
outstanding, no options had been exercised, and 2,216 shares remained available
for future grants pursuant to the BCS 1997 Incentive Plan. The BCS 1997
Incentive Plan will terminate in January 2007. Our board of directors has
determined that no further options will be granted under the BCS 1997 Incentive
Plan after the completion of this offering.
1999 Employee Stock Purchase Plan
In April 1999, our board of directors and stockholders approved the 1999
Employee Stock Purchase Plan, which enables eligible employees to acquire
shares of common stock through payroll deductions. The 1999 Employee Stock
Purchase Plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Code. The initial offering period will start on the date of
this prospectus and end on August 31, 2000, with purchase dates on February 29,
2000 and August 31, 2000, unless otherwise determined by our board of
directors. Each offering under the 1999 Employee Stock Purchase Plan after the
initial offering will run for one year, unless otherwise determined by the
board of directors prior to the beginning of such offering. During each
offering period, an eligible employee may select a rate of payroll deduction of
up to 15% of compensation. The purchase price for the common stock purchased
under the 1999 Employee Stock Purchase Plan is 85% of the lesser of the fair
market value of the shares on the first day or the purchase date. An aggregate
of 250,000 shares of common stock have been reserved for issuance under the
1999 Employee Stock Purchase Plan.
Employment Agreement
With the exception of David M. Fredrick, Vice President/General Manager of ACD
Business Operations, none of our executive officers has an employment
agreement, and each of such executive officers serves at the discretion of our
board of directors. On April 12, 1999, Cortelco entered into an employment
agreement with Mr. Fredrick. Pursuant to the terms of such agreement, Mr.
Fredrick is to receive annual salary of $165,000 in 1999 and an annual salary
of $175,000 in 2000. Mr. Fredrick will receive an option to purchase 70,000
shares of common stock, 60,000 shares of which vest on January 2, 2001 and
10,000 shares of which vest on January 2, 2002.
401(k) Plan
Effective July 15, 1990, as amended on October 1, 1995, our board of directors
adopted an employee savings and retirement plan (the "401(k) Plan") covering
certain of our employees. Pursuant to the 401(k) Plan, eligible employees may
elect to reduce their current compensation by up to the lesser of 16% of such
compensation or the statutorily prescribed annual limit ($10,000 in 1998) and
have the amount of such reduction contributed to the 401(k) Plan. Cortelco may
make contributions equal to 50% of the first 6% of the total of an employee's
elective contribution and/or their after-tax employee contribution up to a
maximum of $2,000 to the 401(k) Plan on behalf of eligible employees.
Additionally, we may make an additional non-matching contribution on a
discretionary basis on behalf of all eligible employees. The 401(k) Plan is
intended to qualify under Section 401 of the Code so that contributions by
employees or by Cortelco to the 401(k) Plan, and income earned on the 401(k)
Plan contributions, and so that contributions by Cortelco, if any, will be
deductible by us when made. The trustee under the 401(k) Plan, at the direction
of each participant, invests the 401(k) Plan employee salary deferrals in
selected investment options. We made contributions to the 401(k) Plan in fiscal
1998 and in the first quarter of fiscal 1999. We presently expect to make
monthly contributions to the 401(k) Plan during fiscal 1999.
Limitation of Liability and Indemnification Matters
Our bylaws provide that we will indemnify our directors and executive officers
and may indemnify our other officers, employees and agents to the fullest
extent permitted by Delaware law. We are also empowered under our bylaws to
enter into indemnification contracts with our directors and executive officers
and to purchase insurance on behalf of any person we are required, or
permitted, to indemnify. Pursuant to this provision, we expect to enter into
indemnity agreements with each of our directors and executive officers.
In addition, our certificate of incorporation provides that, to the fullest
extent permitted by Delaware law, our directors will not be liable for monetary
damages for breach of the directors' fiduciary duty of care to us and our
stockholders. This provision in the certificate of incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available under Delaware law. Each director will continue to be subject to
liability for breach of the director's duty of loyalty to us, acts or omissions
not in good faith or involving intentional misconduct, knowing violations of
law, for any transaction from which the director
38
<PAGE>
derived an improper personal benefit, improper transactions between the
director and us and improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
We expect to enter into agreements with our directors and officers that require
us to indemnify such persons against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred (including expenses of a
derivative action) in connection with any proceeding, whether actual or
threatened, to which any such person may be made a party by reason of the fact
that such person is or was a director or officer of Cortelco or any of its
affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interests of Cortelco and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
39
<PAGE>
Principal and Selling Stockholders
The following table sets forth certain information with respect to the
beneficial ownership of Cortelco's outstanding common stock as of April 15,
1999 and as adjusted to reflect the sale of the common stock being offered
hereby by (1) each person (or group of affiliated persons) who is known by
Cortelco to own beneficially more than 5% of the common stock, (2) each of the
Named Executive Officers, (3) each of the directors, (4) all directors and
executive officers of Cortelco as a group and (5) each of Cortelco's current
stockholders who is expected to sell shares in the offering. Unless otherwise
specified, the address of the stockholder is the address of Cortelco set forth
in this prospectus.
Beneficial ownership is determined in accordance with the rules of the SEC and
generally means sole or shared power to vote or direct the voting or to dispose
or direct the disposition of any common stock. Except as indicated by footnote,
and subject to community property laws where applicable, the persons named in
the table below have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them. The percentage of
beneficial ownership is based on 9,074,827 shares of common stock outstanding
as of April 15, 1999 and shares of common stock outstanding after
completion of this offering assuming no exercise of the underwriters' over-
allotment option. If the underwriters' over-allotment option is exercised in
full, Cortelco and certain stockholders will sell up to shares of common
stock, and shares of common stock will be outstanding after the completion
of this offering.
<TABLE>
<CAPTION>
---------------------------------------------------------------
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering
---------------------- -----------------------
Number of Number of Number of
Beneficial Owner Shares Percent Shares Offered Shares Percent
- ---------------- ------------ --------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
David S. Lee (1)........ 3,581,013 39.5% -- 3,581,013 %
Entities affiliated with
ChinaVest (2).......... 1,888,457 20.8 -- 1,888,457
Cortelco Systems Holding
Corporation (3)........ 795,103 8.8
CMC Industries, Inc.
(4).................... 612,530 6.7
David M. Fredrick....... 562,719 7.0
Frank Naso (5).......... 542,647 6.8
J. Michael O'Dell (6)... 35,417 * -- 35,417 *
Jenny Hsui Theleen (7).. 1,888,457 20.8 -- 1,888,457
Stephen R. Bowling (8).. 862,263 9.4 -- 862,263
Robert P. Dilworth (9).. 4,125 * -- 4,125 *
W. Frank King (10)...... 3,000 * -- 3,000 *
All directors and
executive officers as a
group (10 persons) (11)
....................... 6,149,066 67.0
Other selling
stockholders (12) ..... 147,595 1.6
</TABLE>
- -------------------
* Represents beneficial ownership of less than 1%.
(1) Includes 2,173,380 shares held directly by David S. Lee, 795,103 shares
held by Cortelco Systems Holding Corporation and 612,530 shares held by
CMC. David S. Lee is both Chairman and a principal stockholder of each of
Cortelco Systems Holding Corporation and CMC. David S. Lee disclaims
beneficial ownership of the shares held by Cortelco Systems Holding
Corporation and the shares held by CMC.
(2) Consists entirely of 1,624,072 shares held by ChinaVest IV, L.P., 186,958
shares held by ChinaVest IV-A, L.P. and 77,427 shares held by ChinaVest
IV-B, L.P. (collectively, "ChinaVest"). The address for ChinaVest is 19/F
Dina House, 11 Duddell Street, Central, Hong Kong.
(3) The address for Cortelco Systems Holding Corporation is 1703 Sawyer Road,
Corinth, Mississippi.
(4) The address for CMC Industries, Inc. is 4950 Patrick Henry Drive, Santa
Clara, California.
(5) Frank Naso is an employee of Cortelco and former principal stockholder of
BCS.
(6) Consists entirely of 35,417 shares issuable upon the exercise of options
that will become exercisable within 60 days of April 15, 1999.
(7) Consists entirely of 1,888,457 shares held by ChinaVest. ChinaVest
Partners IV is a general partner of ChinaVest IV, L.P. and ChinaVest IV-A,
L.P. ChinaVest Management Ltd. is a general partner of ChinaVest IV-B,
L.P. Jenny Hsui Theleen is a general partner of ChinaVest Partners IV and
a stockholder of ChinaVest Management Ltd. Jenny Hsui Theleen disclaims
beneficial ownership of these shares except to the extent of her
proportional partnership interest therein.
40
<PAGE>
(8) Includes 7,988 shares held directly by Stephen R. Bowling and 795,103
shares held by Cortelco Systems Holding Corporation which includes 83,165
shares of common stock held by Cortelco Systems Holding Corporation which
are issuable to Stephen R. Bowling upon the exercise of options to
purchase shares of Cortelco Systems Holding Corporation that will become
exercisable within 60 days of April 15, 1999. Also includes 59,172 shares
issuable upon the exercise of options that will become exercisable within
60 days of April 15, 1999. Stephen R. Bowling is the President, Chief
Executive Officer and a director of Cortelco Systems Holding Corporation.
Other than his option for 83,165 shares of common stock, Stephen R.
Bowling disclaims beneficial ownership of the shares held by Cortelco
Systems Holding Corporation.
(9) Consists entirely of 4,125 shares issuable upon the exercise of options
that will become exercisable within 60 days of April 15, 1999.
(10) Consists entirely of 3,000 shares issuable upon the exercise of options
that will become exercisable within 60 days of April 15, 1999.
(11) Includes 108,889 shares issuable upon the exercise of options that will
become exercisable within 60 days of April 15, 1999.
(12) Sold by employees of BCS in connection with the payment of the exercise
price and taxes in connection with the exercise of options held by them.
These employees are Mary Ann Alderman, Ed Barker, Michael Carothers,
Michael Countryman, Jim Coker, Tom Fiore, Dale Goulette, Robert Havens,
Willie Humbert, Dave Kelly, Tom McNeese, Keith Nansteel, John Nicholson,
Wojciech Pawowski, Barbara Putnam and Robert Van de Steeg.
41
<PAGE>
Certain Transactions
Prior to April 1999, Cortelco was a subsidiary of Cortelco Systems Holding
Corporation and from time to time engaged in intercompany transactions with its
parent and affiliates. See note 15 to our consolidated financial statements.
The Cortelco common stock held by our parent company was pledged to secure a
debt obligation in the amount of $3,600,000 as of December 31, 1998. In order
to release this stock from the pledge so that Cortelco Systems Holding
Corporation could distribute it to the holders of its capital stock and
facilitate the acquisition of BCS, an agreement was entered into with the
lender on February 25, 1999 to repay the remaining principal of this obligation
in several installments, the last of which is due in May 1999. We expect to
loan $2,600,000 at an interest rate equal to the prime rate plus 1.5% to
Cortelco Systems Holding Corporation to be used for these payments, of which
$1,300,000 has been advanced as of April 15, 1999. We have also declared
dividends in the amount of $2,658,000, payable upon completion of this
offering, which will be applied to repaying the principal of the loan.
Following release of the pledge, Cortelco Systems Holding Corporation
distributed a total of 2,856,944 shares of our common stock to its stockholders
in April 1999 (the "Spin-Off"). In connection with the Spin-Off, Cortelco
Systems Holding Corporation distributed: 1,137,364 shares of common stock to
David S. Lee, chairman of Cortelco; 612,530 shares to CMC; and 4,667 shares to
Stephen R. Bowling, a director of Cortelco. David S. Lee is also Chairman and a
principal stockholder of Cortelco Systems Holding Corporation. Stephen
R. Bowling is also President, Chief Executive Officer and a director of
Cortelco Systems Holding Corporation. CMC Industries is affiliated with
Cortelco through common stock ownership.
Pursuant to a Convertible Note Purchase Agreement dated as of July 31, 1997, we
sold a convertible promissory note in the aggregate principal amount of
$3,000,000 to ChinaVest, a principal stockholder. The note matures on July 31,
2002 and accrues interest at the rate of 8.0%, payable on the maturity date or
sixty days following the date of conversion. On April 12, 1999, in accordance
with the terms of the note, ChinaVest converted $686,000 of outstanding
principal into 1,463,206 shares of Series A Convertible Preferred Stock. The
Series A Convertible Preferred Stock automatically converts into 1,434,894
shares of our common stock upon completion of this offering. The remaining
principal amount of $2,314,000, plus accrued interest, outstanding under the
note will be paid from the proceeds of this offering. See "Use of Proceeds."
Jenny Hsui Theleen, a director of Cortelco, is a managing director of
ChinaVest.
In July 1997, we loaned Cortelco Systems Holding Corporation the principal
amount of $3,184,000. The note accrues interest at the rate of 8.0% per annum.
In April 1999, we repurchased 250,000 shares of our common stock from Cortelco
Systems Holding Corporation in exchange for the cancellation of $2,500,000 of
the principal amount of the note. The remaining principal amount of $684,000,
plus accrued interest, is due in November 2000.
In October 1997, we loaned J. Michael O'Dell, our Chief Executive Officer and a
director, the principal amount of $132,000 in connection with relocation
expenses. J. Michael O'Dell repaid $61,000 of principal on the note in October
1998. The balance is due in October 1999.
In April 1998, we sold a Millennium system to a public television station for
$210,000. The funding for the purchase was based on a directed donation from
David S. Lee through the Asia Cultural Teachings Corporation, a charitable
foundation. David S. Lee is the honorary president of Asia Cultural Teachings
Corporation.
In April 1998, David S. Lee loaned Cortelco the principal amount of $250,000,
payable on demand. The note was non-interest bearing and was repaid in full in
October 1998. In February 1999, we distributed a note receivable from David S.
Lee in the amount of $250,000, which had been recorded as an offset to
stockholders equity, to Cortelco Systems Holding Corporation as a dividend.
In April 1999, we declared and paid a stock dividend of 195,684 shares of
common stock.
In connection with the BCS acquisition, we issued 1,036,014 shares of our
common stock to David S. Lee, 636,517 shares to David M. Fredrick, 616,444
shares to Frank Naso, 453,562 shares to ChinaVest and 3,321 shares to Stephen
R. Bowling in exchange for their stockholdings in BCS. See "Company
Background." We also entered into an employment agreement with David M.
Fredrick and Frank Naso. See "Management--Employment Agreements."
Since 1993, CMC Industries, Inc., a principal stockholder, has provided certain
manufacturing services on a non-exclusive basis. The current agreement with
CMC, dated as of August 1, 1998, expires on July 31, 1999, and is renewable
annually by Cortelco. David S. Lee is Chairman and a principal stockholder of
CMC.
We purchase single line phones from, and sell Millennium related products to,
Cortelco International, Inc., a wholly- owned subsidiary of Cortelco Systems
Holding Corporation. David S. Lee and Stephen R. Bowling are directors of
42
<PAGE>
Cortelco International, Inc. In fiscal 1998, our purchases from Cortelco
International, Inc. totaled $85,000 and our sales totaled $188,000.
Cortelco believes that all of the transactions set forth above were made on
terms no less favorable to Cortelco than could have been otherwise obtained
from unaffiliated third parties. As a matter of policy, all future transactions
between Cortelco and any of its officers, directors or principal stockholders
will be approved by a majority of the board of directors, including a majority
of the independent and disinterested members of the board.
43
<PAGE>
Description of Capital Stock
The following description of our capital stock and provisions of our
certificate of incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of our certificate of incorporation and bylaws,
which have been filed as exhibits to our registration statement, of which this
prospectus is a part.
Upon the closing of this offering, our authorized capital stock will consist of
50,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of preferred stock, $.001 par value per share. As of April 15, 1999,
there were 9,074,827 shares of common stock outstanding held of record by
approximately 120 stockholders.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
common stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of preferred
stock, holders of common stock are entitled to receive ratably such dividends
as may be declared by the board of directors out of funds legally available for
dividends. In the event of our liquidation, dissolution or winding up, holders
of the common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of the preferred stock,
if any, then outstanding. Holders of common stock have no preemptive rights and
no right to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and non-
assessable.
Preferred Stock
The board of directors has the authority, without further action by the
stockholders, to issue any undesignated shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions of
any shares of preferred stock, including dividend rights, conversion rights,
voting rights, terms of redemption, liquidation preferences, sinking fund terms
and the number of shares constituting any series or the designation of such
series, without any further vote or action by stockholders. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of Cortelco. We have no present plan to issue
any shares of preferred stock.
Registration Rights
After this offering, the holders of approximately shares of common stock
will be entitled to rights to require the registration of such shares under the
Securities Act. If we propose to register any of our securities under the
Securities Act, either for our own account or for the account of other security
holders exercising registration rights, such holders are entitled to notice of
such registration and are entitled, subject to certain limitations, to include
their shares to be registered. The holders may also require us to file a
registration statement under the Securities Act with respect to their shares,
and we are required to use our best efforts to effect up to two such
registrations. Furthermore, the holders may require us to register their shares
on Form S-3 when we become eligible to use such form. Generally, we are
required to bear all registration and selling expenses incurred in connection
with any registrations except for underwriting discounts and commissions. These
rights are subject to conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares included in such
registration.
Delaware Anti-Takeover Law and Certain Charter Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the business combination is approved in a prescribed manner. For purposes of
Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an "interested stockholder" is a person who, together with affiliates and
associates, owns or within three years prior did own, 15% or more of the
corporation's voting stock.
44
<PAGE>
Our certificate of incorporation, effective upon the closing of this offering,
also requires that (1) the terms of the board of directors will be staggered
into three classes, (2) any action required or permitted to be taken by
stockholders of Cortelco must be effected at a duly called annual or special
meeting of the stockholders and may not be effected by written consent, (3) the
stockholders may amend our bylaws or adopt new bylaws only by the affirmative
vote of 66 2/3% of the outstanding voting securities and (4) special meetings
of our stockholders may be called only by the board of directors, the Chairman
of the Board or the Chief Executive Officer. These provisions may have the
effect of delaying, deferring or preventing a change in control of Cortelco.
Transfer Agent and Registrar
American Securities Transfer and Trust has been appointed as the transfer agent
and registrar for our common stock. Its telephone number is (303) 298-5370.
45
<PAGE>
Shares Eligible for Future Sale
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect market prices prevailing from time to time. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale described
below, sales of substantial amounts of common stock in the public market after
the restrictions lapse could adversely affect the prevailing market price and
our ability to raise equity capital in the future.
Upon completion of the offering, we will have shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options and warrants and based upon the number
of shares outstanding as of , 1999. Of these shares, the shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act. The
remaining shares held by existing stockholders, and any shares purchase by
affiliates in this offering, will be "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Our affiliates hold of the
restricted shares. Restricted shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 under the Securities Act, which are summarized below.
Upon completion of this offering, the holders of shares of common stock, or
their transferees, will be entitled to rights to require the registration of
such shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act, except for shares purchased by our
affiliates, immediately upon the effectiveness of such registration. See
"Description of Capital Stock--Registration Rights."
We, our officers, directors and stockholders will agree under written
lock-up agreements not to, without the prior written consent of J.P. Morgan
Securities Inc., sell any shares of common stock for 180 days after the date of
this prospectus. See "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, stockholders who have beneficially owned restricted
shares for at least one year will be entitled to sell in any three-month period
a number of shares that does not exceed the greater of one percent of the then
outstanding shares of our common stock or the average weekly trading volume of
our common stock in the Nasdaq National Market during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
SEC. Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about
Cortelco. A person, or person whose shares may be aggregated, who is not deemed
to have been one of our affiliates at any time during the 90 days immediately
preceding the sale and who has beneficially owned restricted shares for at
least two years is entitled to sell such shares pursuant to Rule 144(k) without
regard to the limitations described above.
Any of our employees, directors or consultants who purchased, or was awarded
shares or options to purchase shares pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701 under the
Securities Act, which permits stockholders to sell their Rule 701 shares
without having to comply with Rule 144's holding period restrictions, in each
case commencing 90 days after the date of this prospectus. In addition, holders
who are not affiliates may sell Rule 701 shares without complying with the
public information, volume and notice provisions of Rule 144.
We intend to file a registration statement under the Securities Act covering
shares of common stock reserved for issuance under our Stock Incentive Plans
and the Purchase Plan. Based on the number of options outstanding and options
and shares reserved for issuance at , 1999, such registration statement
will cover approximately shares. Such registration statement is expected
to be filed and to become effective as soon as practicable after the date of
this prospectus. Shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates, be available
for sale in the open market, unless such shares are subject to vesting
restrictions with Cortelco or the lock-up agreements described above. See
"Management."
46
<PAGE>
Underwriting
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, for whom J.P. Morgan
Securities Inc., Needham & Company, Inc. and A.G. Edwards & Sons, Inc. are
acting as representatives, have severally agreed to purchase, and we and the
selling stockholders have severally agreed to sell to them, an aggregate of
shares of common stock. The number of shares of common stock that each
underwriter has agreed to purchase is set forth opposite its name below.
<TABLE>
<CAPTION>
---------
Number of
Shares
---------
<S> <C>
J.P. Morgan Securities Inc......................................
Needham & Company, Inc..........................................
A.G. Edwards & Sons, Inc........................................
<CAPTION>
---------
<S> <C>
Total...........................................................
<CAPTION>
=========
</TABLE>
The underwriters are offering the common stock subject to their acceptance of
the common stock and subject to prior sale. The underwriting agreement provides
that the obligations of the underwriters to purchase shares of common stock are
subject to the approval of certain legal matters by counsel and to certain
other conditions. If any of the shares of common stock are purchased by the
underwriters pursuant to the underwriting agreement, all of the shares, other
than the shares of common stock covered by the over-allotment option described
below, must be purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and to dealers at such price less a concession not in excess of $
per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other dealers. After the initial
public offering of the common stock, the offering price and other selling terms
may be changed from time to time by the underwriters.
We and certain selling stockholders have granted to the underwriters an option
to purchase up to additional shares of common stock on the same terms and
conditions solely to cover over-allotments. The option may be exercised during
the 30-day period after the date of this prospectus. If the underwriters'
option is exercised in full, the total price to public would be $ , the total
underwriting discounts and commissions would be $ , and total proceeds to us
would be $ , before deducting $ in expenses.
We and the selling stockholders have agreed to indemnify the underwriters
against specified liabilities, including liabilities under the Securities Act,
and to contribute to payments that the underwriters may be required to make in
connection with such liabilities.
We, our officers, directors and stockholders will agree not to, without
the prior written consent of J.P. Morgan Securities Inc., (1) offer, pledge,
announce the intention to sell, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities of
Cortelco which are substantially similar to the common stock, including but not
limited to any securities that are convertible into or exercisable or
exchangeable for, or that represent the right to receive common stock or any
such substantially similar securities or (2) enter into any swap, option,
future, forward or other agreement that transfers, in whole or in part, any of
the economic consequences of ownership of common stock or any securities
substantially similar to the common stock. We may, however, issue shares of
common stock upon the exercise of stock options that are currently outstanding,
and may grant additional options under its stock option plans, provided that,
without the prior written consent of J.P. Morgan Securities Inc., such
additional options shall not be exercisable during such period.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. In addition, the underwriters may bid for, and
purchase, shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concession allowed for distributing
the common stock in the offering, if the syndicate repurchases previously
distributed common stock
47
<PAGE>
in syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price for the shares of common stock offered in
this offering will be determined by negotiation among Cortelco, the selling
stockholders and the underwriters. Among the factors to be considered in
determining the initial public offering price are our revenue and earnings,
market valuations of other companies engaged in activities similar to ours,
estimates of our business potential and prospects, the present state of our
business operations, our management, the general condition of the securities
markets at the time of the offering and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions
and other factors. There can be no assurance that an active trading market will
develop for our common stock or that our common stock will trade in the public
market at or above the initial public offering price.
48
<PAGE>
Legal Matters
The validity of the shares of common stock offered hereby will be passed upon
for Cortelco by Cooley Godward LLP, Palo Alto, California. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Davis Polk & Wardwell, New York, New York.
Experts
The consolidated financial statements of Cortelco Systems, Inc., (except for
Cortelco Systems Puerto Rico Inc. for the year ended July 31, 1996) as of July
31, 1997 and 1998 and for each of the three years in the period ended July 31,
1998, included in this prospectus and the related financial statements included
elsewhere in this registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in this registration statement. The 1996 financial statements of
Cortelco Systems Puerto Rico, Inc. (consolidated with those of Cortelco) have
been audited by PricewaterhouseCoopers LLP, as stated in their report included
herein. The financial statements of Cortelco and its consolidated subsidiaries
are included in this prospectus in reliance upon the reports of Deloitte &
Touche LLP and are given based upon their authority as experts in accounting
and auditing.
The financial statements of Cortelco Puerto Rico, Inc., not separately
presented in this prospectus, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon appears herein. Such financial
statements, to the extent they have been included in the financial statements
of Cortelco Systems, Inc., have been so included in reliance on their report
given on the authority of said firm as experts in auditing and accounting.
The financial statements of BCS Technologies, Inc. as of July 31, 1997 and 1998
and for the year ended July 31, 1998 and the eleven months ended July 31, 1997
included in this prospectus have been audited by Brock and Company, CPA's,
P.C., independent auditors, as stated in their report appearing in this
prospectus and have been included in reliance upon the report of that firm
given upon their authority as experts in accounting and auditing.
Additional Information
A registration statement on Form S-1, relating to the common stock offered has
been filed by with the SEC. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in
the registration statement and the exhibits and schedules thereto. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete. If a contract of document
has been filed as an exhibit to the registration statement, we refer you to the
copy of such contract or other document that has been filed. Each statement in
this prospectus relating to a contract or document filed as an exhibit is
qualified in all respects by the filed exhibit. For further information with
respect to our company and the common stock offered by this prospectus, we
refer you to the registration statement, exhibits and schedules that we have
filed. A copy of the registration statement may be inspected by anyone without
charge at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of material
filed may be obtained from the SEC upon the payment of certain fees prescribed
by the SEC. The SEC also maintains a World Wide Web site that contains
registration statements, reports, proxy and information statements and other
information regarding registrants that file electronically. The address of the
site is www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the SEC and will be required to file periodic
reports, proxy statements and other information with the SEC.
49
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Cortelco Systems, Inc. and Subsidiaries:
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at July 31, 1997 and 1998.................... F-3
Consolidated Statements of Operations for the Years Ended July 31, 1996,
1997 and 1998........................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended July 31, 1996,
1997 and 1998........................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended July 31, 1996, 1997 and 1998...................................... F-6
Notes to Consolidated Financial Statements for the Years Ended July 31,
1996, 1997 and 1998..................................................... F-7
Consolidated Balance Sheets at July 31, 1998 and January 31, 1999
(Unaudited)............................................................. F-20
Consolidated Statements of Operations for the Six Months Ended January
31, 1998 (Unaudited) and 1999 (Unaudited)............................... F-21
Consolidated Statements of Cash Flows for the Six Months Ended January
31, 1998 (Unaudited) and 1999 (Unaudited)............................... F-22
Notes to Consolidated Financial Statements for the Six Months Ended
January 31, 1998 (Unaudited) and 1999 (Unaudited)....................... F-23
BCS Technologies, Inc.:
Independent Auditors' Report............................................. F-25
Balance Sheets at July 31, 1997 and 1998 and January 31, 1999
(Unaudited)............................................................. F-26
Statements of Operations for the Eleven Months Ended July 31, 1997, the
Year Ended July 31, 1998 and the Six Months Ended January 31, 1998
(Unaudited) and 1999 (Unaudited)........................................ F-27
Statements of Cash Flows for the Eleven Months Ended July 31, 1997, the
Year Ended July 31, 1998 and the Six Months Ended January 31, 1998
(Unaudited) and 1999 (Unaudited)........................................ F-28
Statements of Stockholders' Equity (Deficit) for the Eleven Months Ended
July 31, 1997, the Year Ended July 31, 1998 and the Six Months Ended
January 31, 1999 (Unaudited)............................................ F-29
Notes to Financial Statements............................................ F-30
Unaudited Pro Forma Consolidated Financial Information:
Unaudited Pro Forma Consolidated Financial Information................... F-37
Pro Forma Consolidated Balance Sheet at January 31, 1999 (Unaudited) .... F-38
Pro Forma Consolidated Statement of Operations for the Year Ended July
31, 1998 (Unaudited) ................................................... F-39
Pro Forma Consolidated Statement of Operations for the Six Months Ended
January 31, 1998 and 1999 (Unaudited) .................................. F-40
Notes to Pro Forma Consolidated Financial Statements (Unaudited)......... F-41
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of Cortelco Systems, Inc.
We have audited the accompanying consolidated balance sheets of Cortelco
Systems, Inc. and subsidiaries (the "Company"), a 97% owned subsidiary of
Cortelco Systems Holding Corporation, as of July 31, 1997 and 1998 and the
related consolidated statements of operations, cash flows, and stockholders'
equity (deficit) for each of the three years in the period ended July 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the statements of operations and cash flows of
Cortelco Puerto Rico, Inc. (a consolidated subsidiary) for the year ended July
31, 1996, which statements reflect total revenues constituting 39.7% of the
related consolidated total for that year. Those statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar
as it relates to the amounts included for Cortelco Puerto Rico, Inc. for the
year ended July 31 1996, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Cortelco Systems, Inc. and its subsidiaries at July 31,
1997 and 1998 and the results of their operations and their cash flows for each
of the three years in the period ended July 31, 1998 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Memphis, Tennessee
April 9, 1999
F-2
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
At July 31, 1997 and 1998
<TABLE>
-----------------
<CAPTION>
At July
31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Dollars in thousands
ASSETS:
Current assets:
Cash and cash equivalents............................ $ 320 $ 126
Trade accounts receivable, net of allowance for
doubtful accounts of $3,090 and $1,880.............. 8,295 7,109
Current portion of investment in sales-type leases... 146 150
Inventories.......................................... 5,849 6,256
Current portion of cellular telephone equipment
deferred acquisition costs, net..................... 546 269
Other current assets................................. 539 802
--------- ---------
Total current assets............................... 15,695 14,712
Certificate of deposit--restricted..................... 174
Property and equipment, net............................ 1,322 1,317
Receivable from parent................................. 355 656
Receivable (payable) from affiliate.................... (172) 1
Other assets:
Investment in joint venture.......................... 67 67
Cellular telephone equipment deferred acquisition
costs, net.......................................... 172 --
Investment in sales-type leases, noncurrent.......... 72 106
Intangible assets, net of accumulated amortization of
$0 and $4........................................... 315 327
Notes receivable from employees...................... -- 138
Deferred financing costs, net of accumulated
amortization of $0 and $91.......................... 417 511
--------- ---------
Total other assets................................. 1,043 1,149
--------- ---------
Total assets....................................... $ 18,417 $ 17,835
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Dividend payable..................................... $ -- $ 2,667
Checks outstanding................................... 1,615 55
Note payable to related party........................ -- 250
Current portion of long-term debt.................... 129 32
Notes payable under revolving line of credit......... 2,941 2,739
Trade accounts payable............................... 2,294 2,603
Accounts payable to CMC Industries, Inc.............. 2,936 2,205
Amounts payable to minority stockholder of
consolidated joint venture.......................... -- 403
Accrued expenses and other........................... 1,270 1,429
--------- ---------
Total current liabilities.......................... 11,185 12,383
Note payable to parent................................. 750 359
Long-term debt......................................... 4,871 6,041
Minority interest ..................................... -- 174
Commitments and contingencies.......................... -- --
Stockholders' equity (deficit):
Series A convertible preferred stock, $.001 par
value, (10,000,000 shares authorized, none
outstanding)........................................ -- --
Common stock, $.001 par value (50,000,000 shares
authorized, 3,629,224 and 3,920,252 shares issued
and outstanding).................................... 4 4
Additional paid-in capital........................... 9,217 8,324
Accumulated deficit.................................. (4,176) (6,266)
Note receivable from officer/director................ (250) --
Note receivable from parent.......................... (3,184) (3,184)
--------- ---------
Total stockholders' equity (deficit)............... 1,611 (1,122)
--------- ---------
Total liabilities and stockholders' equity......... $ 18,417 $ 17,835
<CAPTION>
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended July 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
-------------------------------------
Year Ended July 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Dollars in thousands, except per share
data
Net revenues............................ $ 38,518 $ 35,635 $ 30,949
Cost of revenues........................ 26,742 24,153 18,504
----------- ----------- -----------
Gross profit........................... 11,776 11,482 12,445
Operating expenses:
Selling, general and administrative.... 7,853 10,103 10,045
Research and development............... 1,256 1,310 1,407
----------- ----------- -----------
Total operating expenses.............. 9,109 11,413 11,452
----------- ----------- -----------
Income from operations.................. 2,667 69 993
Interest expense........................ 1,004 915 826
Management fee expense, net............. 178 406 185
Other expense (income), net............. (54) 272 61
----------- ----------- -----------
Income (loss) from continuing
operations
before income taxes and minority
interest.............................. 1,539 (1,524) (79)
Income tax expense...................... 607 -- --
----------- ----------- -----------
Income (loss) from continuing
operations before minority interest... 932 (1,524) (79)
Minority interest....................... -- -- (54)
----------- ----------- -----------
Income (loss) from continuing
operations............................ 932 (1,524) (133)
Discontinued operations--loss from
operations of Cortelco, Inc . (less
applicable income tax benefit of $607
in 1996)............................... (1,207) (515) --
----------- ----------- -----------
Net loss.............................. $ (275) $ (2,039) $ (133)
=========== =========== ===========
Net income (loss) per common share--
basic and diluted:
Income (loss) from continuing
operations............................ $ 0.24 $ (0.40) $ (0.03)
Income (loss) from discontinued
operations............................ (0.31) (0.13) --
----------- ----------- -----------
Net loss per common share--basic and
diluted............................... $ (0.07) $ (0.53) $ (0.03)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended July 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
-----------------------------
Year Ended July 31,
-----------------------------
1996 1997 1998
Dollars in thousands -------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (275) $ (2,039) $ (133)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation.................................. 474 368 343
Amortization of intangibles................... -- -- 113
Amortization of deferred acquisition costs.... 1,104 1,143 638
Provision for the allowance for doubtful
accounts..................................... 82 985 65
Loss from discontinued operations............. 1,814 515 --
Write-off of purchased software............... 108 -- --
Loss on sales of property and equipment....... -- -- 2
Minority interest ............................ -- -- 54
Changes in net assets and liabilities:
Trade accounts receivable.................... (1,508) 976 1,438
Investment in sales-type leases, net......... 793 424 (38)
Accounts receivable from/payable to
affiliates.................................. 814 (465) (474)
Inventories.................................. (779) 726 73
Deferred acquisition costs................... (863) (1,302) (189)
Other current assets......................... (98) 37 (190)
Trade accounts payable....................... (778) 606 (10)
Accounts payable to CMC Industries, Inc...... 511 (903) (731)
Amounts payable to minority stockholder of
consolidated joint venture.................. -- -- 403
Accrued expenses and other................... 250 78 (259)
-------- --------- --------
Net cash provided by operating activities... 1,649 1,149 1,105
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............ (472) (537) (263)
Purchase of patents, trademarks and process
technology.................................... -- (315) (15)
Maturities of certificates of deposit.......... (5) (6) 174
Net repayments (advances) under notes
receivable from employees..................... -- -- (138)
-------- --------- --------
Net cash used in investing activities....... (477) (858) (242)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving
line of credit................................ 850 (3,232) (202)
Increase (decrease) in checks outstanding...... -- 1,615 (1,560)
Repayments of long-term debt................... (2,007) (1,120) 1,073
Proceeds from issuance of note payable to
related party................................. -- -- 250
Proceeds from issuance of subordinated note.... 92 3,000 --
Repayment of note payable to parent company.... -- -- (391)
Debt issuance costs............................ -- (417) (227)
-------- --------- --------
Net cash used in financing activities....... (1,065) (154) (1,057)
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 107 137 (194)
Cash and cash equivalents, beginning of year.... 76 183 320
-------- --------- --------
Cash and cash equivalents, end of year.......... $ 183 $ 320 $ 126
======== ========= ========
Supplemental cash flow information:
Interest paid.................................. $ 994 $ 923 $ 585
Income taxes paid.............................. -- -- 86
Noncash activity:
1996 and 1997:
All noncash transactions, primarily transfers of assets to/from companies
affiliated through common ownership, are discussed in the accompanying
notes.
1998:
The Company issued 95,343 shares of common stock in exchange for a 55%
interest in a joint venture in mainland China (see Note 9).
Additionally, the Company entered into a barter transaction whereby they
exchanged inventory and installation services valued at approximately
$135,000 for advertising and promotional services.
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended July 31, 1996, 1997 and 1998
<TABLE>
-----------------------------------------------------------------------------
<CAPTION>
Note
Common Stock Receivable From Total
---------------- Additional ----------------- Stockholders'
Paid- Accumulated Officer/ Equity
Shares Amount in Capital Deficit Director Parent (Deficit)
Dollars in thousands --------- ------ ---------- ----------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 3,629,224 $ 4 $ 9,217 $ (612) $ (250) $(3,184) $ 5,175
Net loss................ -- -- -- (275) -- -- (275)
--------- ---- -------- -------- ------- ------- ---------
Balance at July 31, 1996 3,629,224 4 9,217 (887) (250) (3,184) 4,900
Distribution of
Cortelco, Inc.
common stock........... -- -- -- (1,250) -- -- (1,250)
Net loss................ -- -- -- (2,039) -- -- (2,039)
--------- ---- -------- -------- ------- ------- ---------
Balance at July 31, 1997 3,629,224 4 9,217 (4,176) (250) (3,184) 1,611
Issuance of common stock
to acquire interest in
joint venture.......... 95,343 -- 67 -- -- -- 67
Net loss................ -- -- -- (133) -- -- (133)
Stock dividend.......... 195,685 -- 1,957 (1,957) -- -- --
Dividend declaration
(CSI).................. -- -- (2,217) -- 250 -- (1,967)
Dividend declaration
(CSPR)................. -- -- (700) -- -- -- (700)
--------- ---- -------- -------- ------- ------- ---------
Balance at July 31, 1998 3,920,252 $ 4 $ 8,324 $ (6,266) $ -- $(3,184) $ (1,122)
========= ==== ======== ======== ======= ======= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended July 31, 1996, 1997 and 1998
1. Description of Business and Organization
Description of Business--Cortelco Systems, Inc. (the "Company" or "CSI")
designs, develops and markets integrated enterprise communications systems for
routing and controlling the voice, video and data communications of businesses
and other organizations. In addition to selling Millennium systems and related
systems products, Cortelco also resells cellular airtime, cellular telephones
and third-party voice communications systems in Puerto Rico.
Organization--Effective July 31, 1993, the telecommunications business of CMC
Industries, Inc. ("CMC") was spun-off to Cortelco Systems Holding Corporation
("CSHC", the parent company). From August 1, 1993 to July 31, 1995, CSHC
combined the operations of the Company (the "Systems" and "Automatic Call
Distributor" product lines) with the operations related to another product
line, single line telephones, and accounted for these product lines as a single
business unit.
Effective August 1, 1995, CSHC contributed the assets of the "Systems" and
"Automatic Call Distributor" product lines to the Company. The assets were
recorded at historical book value.
2. Basis of Presentation
Basis of Presentation--The Company was a 97% owned subsidiary of CSHC through
April 1999. The consolidated financial statements of CSI include the accounts
of its wholly-owned subsidiaries, Cortelco Puerto Rico, Inc. for all periods
presented and Cortelco, Inc. (the "Automatic Call Distributor" product line)
through March 31, 1997, at which time Cortelco, Inc. was spun-off to CSHC (see
Note 4). The consolidated financial statements also include the accounts of its
55% owned joint venture in mainland China since the date of acquisition (see
Note 9). Minority interest is recognized for the remaining 45% interest in the
financial position and operations of the joint venture. All significant
intercompany balances have been eliminated.
The Company is also affiliated with the following entities through common
stockholder ownership:
Cortelco International, Inc. ("CII", subsidiary of CSHC)
Cortelco Puerto Rico, Inc. ("CPR", subsidiary of CSHC)
Cortelco Canada ("CC", subsidiary of CSHC)
BCS Technologies, Inc.
CMC Industries, Inc.
The Company also has two inactive subsidiaries, Cortelco Holding Corp. and CTC
Holding Corp.
In April 1999 a series of transactions occurred whereby CSHC distributed the
common stock of the Company to the CSHC stockholders and CPR formed a new
wholly-owned subsidiary in the Commonwealth of Puerto Rico, Cortelco Systems
Puerto Rico, Inc. ("CSPR"), in contemplation of a merger between the Company
and the newly formed subsidiary. Previous to the merger, CPR contributed
substantially all of the operations and certain assets and liabilities to the
newly formed CSPR. Cortelco Puerto Rico, Inc. retained certain real estate
assets and the related mortgage note payable. On April 8, 1999, CPR transferred
all issued and outstanding stock of CSPR to CSHC, the Company issued 553,880
shares of common stock to CSHC in exchange for an 100% interest in CSPR and
CSPR assumed the CPR Credit Facility described in Note 11. As the business
combination was between entities under common control, the merger has been
accounted for in a manner similar to a pooling of interests and accordingly,
all periods presented in the accompanying financial statements reflect the
results of operations on an "as if pooled" basis. The common stock issued to
effect the business combination has been reflected as outstanding for all
periods presented.
3. Summary of Significant Accounting Policies
Cash and Cash Equivalents--All highly liquid investments with a maturity of
three months or less are considered to be cash equivalents.
F-7
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
The Company provides a centralized cash management function whereby all cash
receipts on customer accounts are processed through a lockbox arrangement and
swept daily to paydown the line of credit agreement discussed in Note 11. All
cash disbursements are handled through daily draws on the line of credit to
cover the Company's outstanding checks.
Inventories--Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out ("LIFO") method for approximately 81% and
72% of the inventories at July 31, 1997 and 1998, respectively. The first-in,
first-out ("FIFO") method is principally used for the remainder.
Property and Equipment--Property and equipment are stated at cost. Depreciation
is provided using the straight-line method for financial reporting purposes and
accelerated method for income tax reporting purposes over the estimated useful
lives of the assets, generally five to thirty years.
Investments--Investments in affiliates and corporate joint ventures which
represent a 20% to 50% equity interest are accounted for under the equity
method. Investments representing less than a 20% interest are carried at the
lower of cost or net realizable value.
Intangible Assets--Intangible assets primarily represent costs incurred to
acquire and/or establish patents, trademarks and process technology. These
costs are being amortized on a straight-line basis over the estimated useful
lives of the assets, generally five years. The amortization period begins with
the initial introduction of the underlying product to the market in order to
properly match revenue and expense. The Company reviews the carrying value of
intangible assets for impairment based on undiscounted cash flows whenever
events or changes in circumstances occur which might indicate that the carrying
amount might not be recoverable.
Deferred Financing Costs--Deferred financing costs represent costs associated
with the issuance of debt. These costs are being amortized using the effective
interest method over the life of the related debt issue.
Product Warranties--The Company provides the customer with a warranty from the
date of purchase. Estimated warranty obligations are recorded based on actual
claims experience.
Income Taxes--Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The
Company's results are included in the consolidated U.S. income tax return of
Cortelco Systems Holding Corporation. Income taxes are not provided on the
unremitted earnings of the Company's foreign subsidiaries and foreign joint
ventures since it is the Company's intention to continue to reinvest these
earnings.
Revenue Recognition--Revenues are recognized at the time products are shipped
or when title passes. Net sales is comprised of sales reduced by related sales
allowances. Revenues from cellular airtime are recognized when earned based on
cellular airtime contracts. The Company receives sales commissions on certain
transactions with the Puerto Rico Telephone Company. These commissions are
recorded as cellular airtime in the accompanying financial statements.
Cellular Telephone Equipment Deferred Acquisition Costs--The Company offers
commissions to dealers, and discounts to customers, on the sale of cellular
telephone equipment that is part of a simultaneous leasing of cellular
telephone service. These commissions and discounts are deferred and amortized
to income over the life of each contract, which usually ranges from one to
three years.
Allocation of Certain Shared Expenses--The accompanying financial statements
include the assets, liabilities, revenues and expenses specifically
identifiable with the Company as well as certain allocated expenses for
services provided by CSHC and CII. The costs have been allocated using formulas
including estimates of effort expended and sales. The financial statements may
not necessarily reflect the assets and liabilities and results of operations of
the Company had it been operated as a stand-alone entity.
Medical Care and Disability Benefit Plans--The Company is self-insured with
respect to certain medical and disability benefits offered to substantially all
employees through participation in an insurance plan with an affiliated
company. These
F-8
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
costs are charged against earnings in the period in which claims are incurred.
The Company does not provide benefits to retired employees.
Foreign Currency Translation--The assets and liabilities of the foreign joint
venture are translated at current exchange rates with the related translation
adjustments reported as a separate component of stockholders equity. Income
statement accounts are translated at the average exchange rate during the
period.
Earnings Per Share--The Company follows Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings Per Share," which requires disclosure of
basic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding during the year. Diluted EPS is similar to basic EPS
except that the weighted average number of common shares outstanding is
increased to include the number of additional common shares that would have
been outstanding if the potentially dilutive common shares, such as options,
had been issued.
Reverse Stock Split--On February 24, 1999, the Company's board of directors
authorized a 1 for 10 reverse stock split of its common and preferred stock
effective for stockholders of record on March 1, 1999. The Company's board of
directors also approved an amendment to the Company's certificate of
incorporation to decrease the authorized common and preferred shares to
50,000,000 and 10,000,000, respectively, and to increase the par value per
common share from $.0001 to $.001. Shares outstanding and all per share amounts
in the accompanying financial statements have been restated to give effect to
the reverse stock split.
Fair Value of Financial Instruments--The carrying amounts of financial
instruments such as cash, accounts receivable, accounts payable and the
outstanding borrowings under the revolving credit agreement approximate their
fair value due to the short term nature of the instruments. Additionally, the
carrying value of the Company's investment in the foreign joint venture
discussed in Note 9 approximates fair value. As determined by an independent
third-party, the fair value of the Company's subordinated convertible debt
could not be practicably determined due to the lack of a quoted market and the
complex features of the security. Additional information pertinent to the debt
agreement is contained in Note 11.
Estimates--The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications--Certain amounts in the 1997 financial statements have been
reclassified to conform with the 1998 presentation.
New Accounting Standards--In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income," which
established standards for reporting and display of comprehensive income and its
components and requires a separate statement to report the components of
comprehensive income for each period reported. The provisions of this statement
are effective for fiscal years beginning after December 15, 1997. Management
believes this statement may require expanded disclosure in the Company's
financial statements.
In June 1998, FASB issued SFAS 133, "Accounting for Derivative Instruments and
Hedging," which established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The provisions of this statement are
effective for fiscal years beginning after June 15, 1999. Management has not
evaluated what impact, if any, the adoption of this statement will have on the
disclosures in the Company's financial statements.
F-9
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
4. Discontinued Operations
Effective March 31, 1997 the Company distributed all of the outstanding common
stock of its subsidiary in the automatic call distribution business to the CSHC
stockholders. The net assets, results of operations and cash flows of Cortelco,
Inc. have been reported as discontinued operations in the accompanying
financial statements. Summarized financial information of the discontinued
operations is presented as follows:
<TABLE>
<CAPTION>
-------------------
Eight
Year Months
Ended Ended
July 31, March 31,
1996 1997
-------- ---------
<S> <C> <C>
Dollars in thousands
Net revenues.............................................. $ 6,063 $ 2,512
Cost of revenues.......................................... 4,631 1,321
-------- --------
Gross profit............................................. 1,432 1,191
Operating expenses........................................ 3,158 1,620
-------- --------
Loss from operations..................................... (1,726) (429)
Interest expense.......................................... 158 48
Other expense (income), net............................... (70) 38
-------- --------
Loss before income taxes................................. (1,814) (515)
Income tax benefit........................................ 607
-------- --------
Loss from discontinued operations....................... $ (1,207) $ (515)
======== ========
</TABLE>
As of the date of the spin-off, the net assets of the Company's subsidiary in
the automatic call distributor business totalled $1,250,000 and this amount was
charged against retained earnings in the accompanying 1997 balance sheet to
reflect the distribution of the subsidiary's stock.
5. Major Customers and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to a concentration
of credit risk consist principally of cash, trade accounts receivable and notes
receivable. The Company maintains its cash balances with large regional or
national financial institutions and has not experienced losses. The Company's
products are sold principally to dealers, value added resellers, national
accounts and the U.S. government. Approximately 38% of the Company's revenues
are generated within the Commonwealth of Puerto Rico. The Company's credit risk
is limited principally to trade accounts receivable. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. No additional risk beyond amounts provided for collection losses is
believed inherent in the Company's trade accounts receivable.
6. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
------------------
1997 1998
-------- --------
<S> <C> <C>
Dollars in thousands
Raw materials and purchased components...................... $ 910 $ 819
Finished goods.............................................. 5,137 5,551
LIFO reserve................................................ (198) (114)
-------- --------
Total inventories......................................... $ 5,849 $ 6,256
======== ========
</TABLE>
In 1997, the liquidation of LIFO inventories decreased cost of revenues and
therefore decreased the net loss from continuing operations before taxes by
$200,000. In 1998, the liquidation of LIFO inventories decreased cost of
revenues and therefore decreased the net loss from continuing operations before
taxes by $84,000.
F-10
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
7. Investment in Sales-Type Leases
The Company's net investment in sales-type lease contracts consists of:
<TABLE>
------------------
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Dollars in thousands
Future minimum lease contract receivables............... $ 255 $ 326
Less unearned interest income........................... (37) (70)
--------- ---------
Total investment in sales-type leases................. 218 256
Less current portion.................................... (146) (150)
--------- ---------
Investment in sales-type leases, non-current.......... $ 72 $ 106
========= =========
</TABLE>
Annual future minimum lease contract gross receivables under sales-type lease
contracts are as follows:
<TABLE>
<S> <C>
Dollars in thousands
1999................................................................. $ 150
2000................................................................. 67
2001................................................................. 58
2002................................................................. 44
2003 and thereafter.................................................. 7
---------
Total.............................................................. $ 326
=========
</TABLE>
8. Property and Equipment
Property and equipment consists of the following:
<TABLE>
------------------
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Dollars in thousands
Building improvements................................... $ 900 $ 1,000
Machinery and equipment................................. 744 891
Furniture and fixtures.................................. 729 802
Automobiles............................................. 25 73
Construction in progress................................ 42 10
--------- ---------
Total................................................. 2,440 2,776
Less accumulated depreciation........................... (1,118) (1,459)
--------- ---------
Property and equipment, net........................... $ 1,322 $ 1,317
========= =========
</TABLE>
9. Investment in Joint Ventures
The Company has a $67,000 investment representing a 10% equity interest in a
Poland-based company (DTS/ZWUT) which will manufacture, sell and distribute
products designed and marketed by the Company. The Company accounts for its
interest in the joint venture at the lower of cost or net realizable value.
During 1996, the Company entered into an acquisition agreement with a Taiwanese
company ("Sea Union") whereby the Company has the option to acquire controlling
interests in several telecommunications joint ventures in mainland China over
an extended period of time in exchange for Company stock.
On August 11, 1997, the Company exercised its option to acquire a controlling
interest in one of the joint ventures. The Company acquired a 55% interest in
Heilongjiang Longhai Telecommunication Equipment Co., Ltd. ("Longhai") in
exchange for 95,343 shares of the Company's common stock valued at $67,000. The
acquisition was recorded under the
F-11
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
purchase method of accounting and accordingly, the results of operations have
been included in the consolidated financial statements since the date of
acquisition. The purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair market value at the date of
acquisition.
10. Accrued Expenses and Other
Accrued expenses and other consists of the following:
<TABLE>
------------------
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Dollars in thousands
Employee compensation..................................... $ 128 $ 152
Commissions............................................... 96 85
Vacation.................................................. 267 259
Warranty.................................................. 340 250
Interest.................................................. -- 263
Financing costs........................................... 195 --
Other..................................................... 244 420
--------- ---------
Total................................................... $ 1,270 $ 1,429
========= =========
</TABLE>
11. Debt
Cortelco Systems, Inc. Revolving Credit Facility--On July 31, 1997, CSI entered
into a new loan and security agreement with Foothill Capital (the "CSI Credit
Facility") which provides for borrowings based upon an asset formula involving
eligible accounts receivable and inventories, up to a maximum of $7,500,000,
including letters of credit, and expires in July 2001. At July 31, 1998, CSI
had outstanding borrowings under this facility of $2,353,000. The Company had
no outstanding letters of credit at July 31, 1998. The borrowings are
collateralized by substantially all the assets of the Company. The CSI Credit
Facility provides for interest at the reference rate plus the margin in effect,
which fluctuates during the term of the CSI Credit Facility, based on the
Company's satisfaction of certain minimum income requirements. At July 31, 1998
the effective interest rate was 8.875% (prime rate of 8.5% plus a margin of
.375%). The CSI Credit Facility also provides for an annual facility fee equal
to .125% of the maximum borrowing base and an annual unused line fee equal to
.375% based upon the average unused portion of the available credit.
The CSI Credit Facility also contains covenants which, among other matters,
limit the ability of the Company to incur indebtedness; merge, consolidate or
acquire or sell assets; pay dividends; or redeem or exchange capital stock. At
July 31, 1998 the Company was not in compliance with certain covenants
contained in the CSI Credit Facility. On March 30, 1999, the Company received a
waiver related to the covenants previously in default. On April 8, 1999, the
CSI Credit Facility was amended to pledge the outstanding common stock of CSPR.
Cortelco Puerto Rico, Inc. ("CPR") Revolving Credit Facility--On August 29,
1997, CPR entered into a new revolving line of credit agreement with Foothill
Capital (the "CPR Credit Facility") under which CPR may borrow up to
$1,500,000. The agreement provides for interest at a variable rate plus 1.25%
(9.75% at July 31, 1998). The CPR Credit Facility contains various restrictive
covenants and is secured by liens on accounts receivable and inventories as
well as a pledge of CPR's stock. At July 31, 1998, CPR had outstanding
borrowings under this facility of $386,000.
The CPR Credit Facility contains covenants which, among other matters limit the
ability of CPR to incur indebtedness; merge, consolidate or acquire or sell
assets; pay dividends; or redeem or exchange capital stock. At July 31, 1998,
CPR was not in compliance with certain covenants contained in the CPR Credit
Facility. On March 30, 1999, CPR received a waiver related to the covenants
previously in default.
On April 8, 1999, in connection with the assumption of the CPR Credit Facility
by CSPR (see Note 2), the CPR Credit Facility was amended to include as an
event of default a failure by CSHC to pledge the outstanding stock of CII to
the lender on or before May 28, 1999, as contemplated by CII's credit facility
with the lender.
F-12
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
Long-term debt consists of the following:
<TABLE>
------------------
<CAPTION>
1997 1998
--------- ---------
Dollars in thousands
<S> <C> <C>
Subordinated note (1)................................... $ 3,000 $ 3,000
Note payable to bank by CPR (2)......................... 2,000 3,073
--------- ---------
Total................................................. 5,000 6,073
Less amounts payable within one year.................... (129) (32)
--------- ---------
Long-term debt, less current portion.................. $ 4,871 $ 6,041
========= =========
</TABLE>
- -------------------
(1) The outstanding balance of $3,000,000 represents borrowings under a
subordinated note agreement dated July 31, 1997 with ChinaVest IV, L.P. The
note matures on July 31, 2002 and is convertible into shares of the
Company's Series A Convertible Preferred Stock based on a conversion price
determined by a formula defined in the agreement, which is based on the
Company's audited net income for the fiscal year ended July 31, 1998. Based
on the conversion price formula, the holder can convert $686,000 of
principal to 1,463,206 shares of Series A Convertible Preferred Stock. The
holder has the option to convert the note at any time subsequent to July
31, 1998. The agreement provides for interest at the rate of 8% annually.
Upon conversion, the accrued interest on the principal amount converted by
the holder is payable within sixty days following the date of conversion.
The Company's Series A Convertible Preferred Stock has full voting rights
and is convertible into common shares at any time.
The agreement also contains covenants which, among other matters, limit the
ability of the Company to merge, consolidate, acquire, or sell assets. At
July 31, 1998, the Company was not in compliance with a covenant contained
in the agreement. On April 5, 1999, the Company received a waiver related
to the covenant previously in default. Additionally on April 5, 1999, the
holder of the subordinated note provided their consent to a series of
transactions, including the merger with CSPR and the reverse stock split
discussed in Note 1 and the repurchase of common stock from CSHC in partial
settlement of the outstanding note receivable (see Note 15).
(2) The outstanding balance at July 31, 1997 represents borrowings by CPR under
a term loan agreement bearing interest at an annual rate of 9.85%. On
August 29, 1997, the agreement was refinanced. The new agreement bears
interest at a fixed rate of 10% and is due in monthly installments of
principal and interest totalling $28,170 through September 1, 2002.
Subsequent to September 1, 2002, the remaining principal balance will be
negotiated for a period of five additional years. The agreement is
collateralized by certain property.
The scheduled repayment of long-term debt is as follows:
<TABLE>
<CAPTION>
Dollars in thousands
<S> <C>
1999................................................................. $ 32
2000................................................................. 35
2001................................................................. 39
2002................................................................. 3,043
2003 and thereafter.................................................. 2,924
---------
Total................................................................ $ 6,073
=========
</TABLE>
F-13
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
12. Lease Commitments
The Company leases its primary warehouse and office facilities, as well as
certain office equipment, under operating leases.
The following is a schedule of future minimum lease payments required under
operating leases that have remaining initial or remaining noncancellable lease
terms in excess of one year as of July 31, 1998:
<TABLE>
<S> <C>
Dollars in thousands
1999..................................................................... $ 443
2000..................................................................... 177
2001..................................................................... 174
2002..................................................................... 179
2003 and thereafter...................................................... 154
------
Total.................................................................... $1,127
======
</TABLE>
Rent expense for the years ended July 31, 1996, 1997, and 1998 totaled
$540,000, $526,000, and $446,000, respectively, which included $46,000,
$137,000, and $137,000, respectively, rent charged by CII for the sharing of
warehouse space.
13. Income Taxes
The Company's current taxable income has historically been included in the
consolidated income tax return of CSHC. There does not currently exist a tax
sharing agreement for allocating income taxes. The consolidated provision or
benefit is allocated proportionately between the subsidiaries of CSHC based on
the contribution of each company in the consolidated federal tax return as if
each company calculated its tax on a separate return basis.
The financial statements of the Company do not include a provision (benefit)
for income taxes for 1997 and 1998 due to cumulative net operating losses.
The components of income tax expense attributable to continuing operations for
1996 are as follows:
<TABLE>
<S> <C>
Dollars in thousands
Current:
Federal................................................................. $534
State................................................................... 73
----
Total current............................................................. 607
Deferred:
Federal................................................................. --
State................................................................... --
----
Total deferred............................................................ --
----
Total income tax expense.................................................. $607
====
</TABLE>
F-14
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
A reconciliation between the income tax expense from continuing operations
recognized in the Company's consolidated statement of operations and the income
tax expense computed by applying the domestic federal statutory income tax rate
to income from continuing operations before income taxes is as follows:
<TABLE>
<CAPTION>
---------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Dollars in thousands
Income tax at statutory rate (35%)........ $ 539 $ (533) $ (29)
State income taxes, net of federal
benefit.................................. 47 -- --
Additional taxes on foreign income........ 5 (30) (2)
Foreign earnings not repatriated.......... -- -- (23)
Change in valuation allowance............. (7) 524 5
Other, net................................ 23 39 49
--------- --------- ---------
Total income tax expense................ $ 607 $ -- $ --
========= ========= =========
</TABLE>
Income taxes are not provided for the undistributed earnings of the foreign
joint venture as such earnings are intended to be permanently reinvested. Such
earnings would become taxable upon the sale or liquidation or upon the
remittance of dividends. Accumulated undistributed earnings on which U.S. taxes
have not been provided are approximately $66,000.
The deferred tax effects of the Company's principal temporary differences at
July 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
----------------------------------
Assets Liabilities Total
Dollars in thousands --------- ----------- ---------
1997
- ----
<S> <C> <C> <C>
Allowance for doubtful receivables....... $ 888 $ -- $ 888
Inventories.............................. 444 (207) 237
Basis difference in property and
equipment............................... 184 -- 184
Accrued warranty costs................... 54 -- 54
Accrued expenses and other............... 20 -- 20
Deferred costs........................... -- (280) (280)
Other.................................... 115 -- 115
Net operating loss carryforwards......... 255 -- 255
Minimum tax credits...................... 154 -- 154
Valuation allowance...................... (1,627) -- (1,627)
--------- --------- ---------
Total deferred asset (liability)....... $ 487 $ (487) $ --
========= ========= =========
<CAPTION>
1998
- ----
<S> <C> <C> <C>
Allowance for doubtful receivables....... $ 574 $ -- $ 574
Inventories.............................. 350 (78) 272
Basis difference in property and
equipment............................... 157 -- 157
Accrued warranty costs................... 54 -- 54
Accrued expenses and other............... 47 -- 47
Deferred costs........................... -- (106) (106)
Other.................................... 88 -- 88
Net operating loss carryforwards......... 392 -- 392
Minimum tax credits...................... 154 -- 154
Valuation allowance...................... (1,632) -- (1,632)
--------- --------- ---------
Total deferred asset (liability)....... $ 184 $ (184) $ --
========= ========= =========
</TABLE>
At July 31, 1998 the Company's allocated portion of the consolidated net
operating loss carryforward is approximately $334,000, which expires at various
dates through 2013. During the year ended July 31, 1996, the Company utilized
F-15
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
approximately $2,554,000 of net operating loss carryforwards. The provision for
income taxes for 1996 includes a benefit of approximately $893,900 related to
the utilization of these carryforwards.
14. Stock Options
During 1998, the Board of Directors approved the adoption of the 1997 Equity
Incentive Plan (the "Plan") which permits the granting of incentive stock
options, supplemental stock options, stock bonuses, and restricted stock
purchase agreements to officers, directors and key employees of the Company and
to non-employee consultants. At July 31, 1998, 250,000 shares of the Company's
common stock were reserved for issuance under the terms of the Plan. Incentive
stock options are granted only to employees and are issued at prices not less
than 100% of the fair market value of the stock at the date of grant. The
options vest over a four-year period and the term of any option shall not be
greater than ten years from the date of grant. Stock bonuses and restricted
stock purchase agreements are granted only to directors, officers, or employees
of or consultants to the Company and are issued at prices not less than 85% of
the fair market value of the stock at the date of grant. During 1998, 139,311
options were granted with exercise prices ranging from $.70 to $1.00 per share
and remain outstanding at July 31, 1998. No compensation expense related to
stock option grants was recorded during 1998 as the option exercise prices were
equal to or greater than fair market value on the date of grant.
The status of the Company's stock option plan is as follows:
<TABLE>
------------
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
------- --------
<S> <C> <C>
Granted....................................................... 139,311 $0.885
Exercised..................................................... -- N/A
Cancelled..................................................... -- N/A
------- ------
Outstanding at July 31, 1998.................................. 139,311 $0.885
======= ======
Options exercisable at July 31, 1998.......................... 7,904 $0.945
======= ======
</TABLE>
The options outstanding at July 31, 1998 are exercisable at prices ranging from
$.70 to $1.00 per share. The weighted average remaining contractual life of all
outstanding options was 9.81 years at July 31, 1998.
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," under which no compensation cost for stock
options is recognized for options granted at or above fair market value. Had
compensation expense been determined based upon fair values at the grant dates
in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would not have been different as
the fair value of the options was determined to be zero on the applicable dates
of grant.
15. Related Parties
As discussed in Note 1, certain expenses reflected in the financial statements
include allocations of expenses from CSHC and CII. These allocations include:
insurance, computer maintenance, general warehousing expenses, and salesmen
expenses.
During 1997, CSHC incurred certain costs on behalf of CSHC's subsidiaries.
Management of CSHC allocated these costs proportionately among the subsidiaries
based on estimates of effort expended and sales. As a result, the Company
incurred management fee expense of $406,000 for the year ended July 31, 1997.
During 1998, certain costs were incurred by CSI on behalf of CSHC and the
consolidated group. The costs incurred by CSI related to certain administrative
functions, such as administration of insurance and benefit plans, handling of
legal and accounting matters, etc. As a result, CSI recognized management fee
income of $80,000 for the year ended July 31, 1998. During 1998, CPR received
various administrative services from CSHC and incurred management fee expense
of $265,000 for the year ended July 31, 1998.
F-16
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
At July 31, 1997 and 1998, the Company's accounts include a receivable of
$355,000 and $656,000, respectively, due from CSHC. The amount in 1998 includes
an intercompany tax receivable of $86,000. Additionally, CPR has a non-interest
bearing demand note payable with CSHC. At July 31, 1997 and 1998, the balance
outstanding totaled $750,000 and $359,000, respectively. This note is
subordinate to the CPR revolving credit facility discussed in Note 11.
The Company also has a $3,184,000 note receivable from CSHC that has been
reflected as a reduction of stockholders' equity in the accompanying balance
sheets as of July 31, 1997 and 1998. The note matures on or before December 31,
2002, subject to CSHC's ability to repay the $3,600,000 note payable to
corporation discussed in Note 18.
During 1996, 1997, and 1998 the Company recognized sales to a company
affiliated through common stockholder ownership (CII) totalling $519,000,
$65,000, and $85,000, respectively. The Company also had inventory purchases
from this affiliate totalling $1,165,000, $692,000, and $188,000, respectively.
At July 31, 1997 and 1998, the Company's accounts include a $172,000 payable to
and a $1,000 receivable from CII, respectively.
The Company has a manufacturing services agreement with CMC (primary contract
electronic manufacturer), an affiliate through common stockholder ownership.
During 1996, 1997, and 1998 the Company purchased approximately $14,892,000,
$10,663,000, and $9,351,000, respectively, under the agreement. Additionally
the Company recognized sales to CMC during 1996, 1997, and 1998 of
approximately $767,000, $128,000, and $154,000, respectively, in component
parts. The agreement expired during 1997, however, subsequent to July 31, 1998
the Company renewed the agreement.
At July 31, 1998, the Company had a $250,000 non-interest bearing demand note
payable to a stockholder of CSHC. Subsequent to year-end, the note payable was
paid in full.
At July 31, 1997 and 1998, the Company's trade accounts receivable include
$124,000 and $95,000, respectively, due from a company affiliated through
common stockholder ownership (BCS Technologies, Inc.). Sales to this affiliate
totaled approximately $975,000, $392,000, and $353,000 during the years ended
July 31, 1996, 1997, and 1998, respectively.
At July 31, 1998, the Company's accounts include $403,000 due to the minority
stockholder of Longhai for expenses paid by the stockholder on behalf of the
joint venture.
16. Employee Savings Plan
Substantially all employees of the Company can participate in the Cortelco
International, Inc. Profit Sharing Plan, which is qualified under Section 401
of the Internal Revenue Code. Under the provisions of the plan, all
participants may contribute up to 16% of their compensation, subject to
limitations established by the Internal Revenue Service. The Company may
contribute a matching contribution of not less than 50% of the employee
contributions up to 6% of the employee's compensation. The Company may also
provide special discretionary contributions equal to a percentage of an
employee's annual compensation and/or an amount determined by management.
During 1996, 1997, and 1998 contributions allocated to the Company totaled
$115,000, $119,000, and $110,000, respectively.
17. Segment Information
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued effective for fiscal years beginning after
December 15, 1997. The statement allows, and the Company has chosen, the early
adoption of this statement for the year ended July 31, 1998.
The Company's reportable segments are communications systems, China
operations--Longhai and cellular airtime services, each of which offers
different products and services. Each segment requires different technology and
marketing strategies. The communication systems solutions segment offers
communications solutions that address the voice, video, and data network
switching requirements of small and medium sized installations. The Company's
cellular airtime services segment offers cellular airtime and cellular
telephones through CPR. The China Operations--Longhai segment represents the
Company's 55% ownership of a Chinese telecommunications equipment company.
F-17
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
The accounting policies of the segments are those described in the summary of
significant accounting policies.
<TABLE>
<CAPTION>
----------------------------------------------------
China Cellular
Dollars in thousands Communications Operations - Airtime Consolidated
1996 Systems Longhai Services Total
- -------------------- -------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 28,334 N/A $ 10,184 $ 38,518
Operating income........ 2,634 N/A 33 2,667
Total assets............ 14,616 N/A 3,560 18,176
Capital expenditures.... 470 N/A 2 472
Depreciation and
amortization........... 467 N/A 7 474
<CAPTION>
1997
- ----
<S> <C> <C> <C> <C>
Revenues................ $ 25,838 N/A $ 9,797 $ 35,635
Operating income........ 311 N/A (242) 69
Total assets............ 14,981 N/A 3,436 18,417
Capital expenditures.... 370 N/A 167 537
Depreciation and
amortization........... 354 N/A 14 368
<CAPTION>
1998
- ----
<S> <C> <C> <C> <C>
Revenues................ $ 23,464 $ 777 $ 6,708 $ 30,949
Operating income........ 755 138 100 993
Total assets............ 14,566 1,269 2,000 17,835
Capital expenditures.... 249 8 6 263
Depreciation and
amortization........... 414 18 24 456
</TABLE>
Financial information relating to the Company's revenues by geographic area was
as follows:
<TABLE>
<CAPTION>
-------------------------------
1996 1997 1998
Dollars in thousands --------- --------- ---------
<S> <C> <C> <C>
United States.................................. $ 37,784 $ 34,994 $ 29,404
Central America................................ 161 324 256
Europe......................................... 136 29 42
South America.................................. 409 168 184
Saudi Arabia................................... -- 119 128
South Africa................................... -- -- 44
China.......................................... 28 1 782
Taiwan......................................... -- -- 109
--------- --------- ---------
Consolidated................................. $ 38,518 $ 35,635 $ 30,949
========= ========= =========
</TABLE>
18. Commitments and Contingencies
At July 31, 1998 the stock of the Company was pledged as collateral under a
$3,600,000 note payable from CSHC to a corporation. The note matured in
September 1998 and was secured by the outstanding common stock of the Company
and a personal guaranty of the single largest stockholder of CSHC. CSHC did not
make the scheduled payment due in September 1998. On February 25, 1999, CSHC
entered a consent agreement with the corporation whereby the stock of CSI was
released from the original pledge agreement in order to allow the CSI spin-off
discussed in Note 2. Additionally, the corporation agreed not to declare an
event of default. In exchange for the corporation's consent, CSHC remitted
$1,000,000 of the amount outstanding and agreed to a revised repayment
schedule. In connection with the transaction, CSHC's single largest stockholder
loaned CSHC $1,000,000.
F-18
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1996, 1997 and 1998
The Company is involved in various matters of litigation, claims, and
assessments arising in the ordinary course of business. In the opinion of
management, the eventual disposition of these matters will not have a material
adverse effect on the financial statements.
19. Earnings Per Share
The computations of basic and diluted earnings per share for each year were as
follows:
<TABLE>
<CAPTION>
---------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Dollars in thousands, except per share data
Income (loss) from continuing operations... $ 932 $ (1,524) $ (133)
Discontinued operations.................... (1,207) (515) --
--------- --------- ---------
Income (loss) available to common
shareholders............................. (275) (2,039) (133)
Weighted average shares outstanding........ 3,825 3,825 3,918
--------- --------- ---------
Basic and diluted earnings per share...... $ (0.07) $ (0.53) $ (0.03)
========= ========= =========
</TABLE>
Options to purchase 139,311 shares of common stock were outstanding at July 31,
1998 but were not included in the computation of the diluted earnings per share
because the options' exercise price was equal to or greater than the average
market price of the common shares. Additionally, at July 31, 1997 and 1998,
$686,000 of convertible subordinated debt was convertible into 1,463,206 shares
of convertible preferred stock which was convertible into 1,434,894 shares of
common stock. All of these potential common shares were excluded from the
computation of diluted earnings per share for 1997 and 1998 because their
inclusion would have had an antidilutive effect on earnings per share.
20. Subsequent Events
On February 24, 1999, the Company's Board of Directors declared a dividend of
$2,216,514 payable to the stockholders (CSHC and Sea Union) of record on
February 26, 1999. Approximately $1,957,000 of the dividend declared is payable
upon certain events occurring in the future. The remaining amount of the
dividend declaration primarily relates to the distribution of the non-interest
bearing note receivable from an officer/director to CSHC. As the Company has a
retained deficit, the dividend is recorded as a return of capital. The dividend
has been reflected in the financial statements as if declared on July 31, 1998.
On April 5, 1999, the Company's Board of Directors declared a stock dividend of
195,685 shares of the Company's common stock to stockholders of record on April
5, 1999. The dividend was charged to the accumulated deficit in the amount of
$1,956,850, which was based on the fair value of the Company's common stock as
determined by the Board of Directors. The stock dividend has been reflected in
the financial statements as if declared on July 31, 1998.
On April 5, 1999, the Company received 250,000 shares of its common stock from
CSHC in exchange for a $2,500,000 reduction of the outstanding note receivable
balance.
On April 8, 1999, previous to the merger discussed in Note 1, CSPR declared a
dividend of $700,000 payable to the stockholder (CSHC) of record on April 8,
1999, payable upon certain events occurring in the future. The dividend has
been reflected in the financial statements as if declared on July 31, 1998.
Subsequent to year-end, the Company entered into a letter of intent agreement
to merge with an affiliated company, BCS Technologies, Inc.
F-19
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
At July 31, 1998 and January 31, 1999
<TABLE>
<CAPTION>
-----------------------
July 31, January 31,
1998 1999
--------- -----------
<S> <C> <C>
Dollars in thousands
ASSETS
Current assets:
Cash and cash equivalents............................ $ 126 $ 160
Trade accounts receivable, net of allowance for
doubtful accounts of $1,880 and $2,101.............. 7,109 9,719
Current portion of investment in sales-type leases... 150 76
Inventories.......................................... 6,256 5,386
Current portion of cellular telephone deferred
acquisition costs, net.............................. 269 157
Other current assets................................. 802 728
--------- ---------
Total current assets................................ 14,712 16,226
Certificate of deposit--restricted.................... -- --
Property and equipment, net........................... 1,317 1,436
Receivable from parent................................ 656 715
Receivable (payable) from affiliate................... 1 --
Other assets:
Investment in joint venture.......................... 67 67
Investment in sales-type leases, noncurrent.......... 106 87
Intangible assets, net of accumulated amortization of
$4 and $6........................................... 327 348
Notes receivable from employees...................... 138 93
Deferred financing costs, net of accumulated
amortization of $91 and $157........................ 511 435
Other assets......................................... -- 183
--------- ---------
Total other assets.................................. 1,149 1,213
--------- ---------
Total assets........................................ $ 17,835 $ 19,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Dividends payable.................................... $ 2,667 $ 2,779
Checks outstanding................................... 55 --
Note payable to related party........................ 250 --
Current portion of long-term debt.................... 32 34
Notes payable under revolving line of credit......... 2,739 2,613
Trade accounts payable............................... 2,603 3,849
Accounts payable to CMC Industries, Inc.............. 2,205 2,420
Amounts payable to minority stockholder of
consolidated joint venture.......................... 403 --
Accrued expenses and other........................... 1,429 2,042
--------- ---------
Total current liabilities........................... 12,383 13,737
Note payable to parent................................ 359 259
Long-term debt........................................ 6,041 6,023
Minority interest .................................... 174 180
Commitments and contingencies......................... -- --
Stockholders' equity (deficit):
Series A convertible preferred stock, $.001 par
value,
(10,000,000 shares authorized, none outstanding).... -- --
Common stock, $.001 par value (50,000,000 shares
authorized,
3,920,252 shares issued and outstanding)............ 4 4
Additional paid-in capital........................... 8,324 8,324
Accumulated deficit.................................. (6,266) (5,753)
Note receivable from parent.......................... (3,184) (3,184)
--------- ---------
Total stockholders' equity (deficit)................ (1,122) (609)
--------- ---------
Total liabilities and stockholders' equity.......... $ 17,835 $ 19,590
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
F-20
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Six Months Ended January 31, 1998 and 1999
<TABLE>
<CAPTION>
---------------------
Six Months Ended
January 31,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Dollars in thousands, except per share data
Net revenues........................................... $ 15,296 $ 17,482
Cost of revenues....................................... 9,143 10,307
--------- ---------
Gross profit.......................................... 6,153 7,175
Operating expenses:
Selling, general and administrative................... 5,147 5,237
Research and development.............................. 679 917
--------- ---------
Total operating expenses............................. 5,826 6,154
--------- ---------
Income from operations................................. 327 1,021
Interest expense....................................... 425 412
Management fee expense (income), net................... 38 (10)
Other expense (income), net............................ (46) 30
--------- ---------
Income (loss) from continuing operations before income
taxes and minority interest.......................... (90) 589
Income tax expense..................................... -- 70
--------- ---------
Income (loss) from operations before minority
interest............................................. (90) 519
Minority interest...................................... (62) (6)
--------- ---------
Net income (loss)..................................... $ (152) $ 513
========= =========
Net income (loss), per common share:
Basic................................................. $ (0.04) $ 0.13
Diluted............................................... $ (0.04) $ 0.10
</TABLE>
See notes to consolidated financial statements (unaudited).
F-21
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended January 31, 1998 and 1999
<TABLE>
<CAPTION>
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ (152) $ 513
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 209 221
Amortization of deferred acquisition costs........... 195 112
Amortization of intangibles.......................... -- 95
Provision for the allowance for doubtful accounts.... 96 40
Minority interest.................................... 62 6
Changes in net assets and liabilities:
Trade accounts receivable........................... 1,323 (2,650)
Investment in sales-type leases, net................ (39) 93
Accounts receivable from/payable to affiliates...... (388) 54
Inventories......................................... (729) 870
Other current assets................................ (173) 74
Other assets........................................ -- (183)
Trade accounts payable.............................. 1,068 1,246
Accounts payable to CMC Industries, Inc............. (66) 215
Amounts payable to minority stockholder............. -- (189)
Accrued expenses and other.......................... (134) 399
--------- ---------
Net cash provided by operating activities.......... 1,272 916
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................... (219) (340)
Proceeds from sales of property and equipment......... 37 2
Purchase of patents, trademarks, and process
technology........................................... (14) (27)
Net repayments (advances) under notes receivable from
employees............................................ (132) 45
Maturities of certificates of deposit................. 174 --
--------- ---------
Net cash used in investing activities.............. (154) (320)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under revolving line of credit......... (560) (126)
Decrease in checks outstanding........................ (1,615) (55)
Repayments of long-term debt.......................... (2,012) (16)
Repayment of note payable to parent company........... (250) (100)
Repayment of note payable to related party............ -- (250)
Proceeds from term debt............................... 3,100 --
Debt issuance costs................................... (4) (15)
--------- ---------
Net cash used in financing activities.............. (1,341) (562)
--------- ---------
Net increase (decrease) in cash and cash equivalents.. (223) 34
Cash and cash equivalents, beginning of period........ 320 126
--------- ---------
Cash and cash equivalents, end of period.............. $ 97 $ 160
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
F-22
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended January 31, 1998 and 1999
1. Financial Statement Presentation
The accompanying consolidated financial statements have been prepared by the
Company, without audit. It is management's opinion that these statements
include all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the financial position, results of operations, and
cash flows as of January 31, 1999 and for all periods presented. The results
for the six months ended January 31, 1998 and 1999 are not necessarily
indicative of the results that may be expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto as of July 31, 1997 and 1998 and for
each of the three years in the period ended July 31, 1998.
2. Earnings Per Share
The computations of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
---------------------
Six Months Ended
January 31,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Dollars in thousands, except per share data
Basic earnings per share:
Income (loss) from operations......................... $ (152) $ 513
Weighted average shares outstanding--basic............ 3,909 3,920
--------- ---------
Basic earnings per share............................ $ (0.04) $ 0.13
========= =========
Diluted earnings per share:
Income:
Income (loss) from operations......................... $ (152) $ 513
Interest on 8% convertible subordinated debt.......... 27
--------- ---------
Income (loss) available to common shareholders...... (152) 540
Weighted average shares:
Outstanding........................................... 3,909 3,920
Assumed conversion of 8% convertible subordinated
debt................................................. 1,435
Dilutive effect of stock options...................... 152
--------- ---------
Weighted average shares outstanding--diluted........ 3,909 5,507
--------- ---------
Diluted earnings per share.......................... $ (0.04) $ 0.10
========= =========
</TABLE>
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
-----------------------
July 31, January 31,
1998 1999
--------- -----------
<S> <C> <C>
Dollars in thousands
Raw materials and purchased components................. $ 819 $ 942
Finished goods......................................... 5,551 4,558
LIFO reserve........................................... (114) (114)
--------- ---------
Total inventories.................................... $ 6,256 $ 5,386
========= =========
</TABLE>
F-23
<PAGE>
Cortelco Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)--(Continued)
Six Months Ended January 31, 1998 and 1999
4. Segment Information
<TABLE>
<CAPTION>
---------------------------------------------------
China Cellular
Communication Operations-- Airtime Consolidated
Systems Longhai Services Total
------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Dollars in thousands
Six months ended January
31, 1998:
External revenue...... $11,336 $ 562 $ 3,398 $ 15,296
Intersegment reserve.. -- -- -- --
Income from
operations........... (129) 136 320 327
Six months ended January
31, 1999:
External revenue...... 14,284 326 2,872 17,482
Intersegment reserve.. -- -- -- --
Income from
operations........... 279 7 735 1,021
</TABLE>
Following is a reconciliation of profits from operating segments to income
before income taxes for the six month periods ended January 31, 1998 and 1999:
<TABLE>
<CAPTION>
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Dollars in thousands
Total for reportable segments........................ $ 327 $ 1,021
Unallocated:
Interest expense................................... 425 412
Management fee income (expense).................... 38 (10)
Other, net......................................... (46) 30
--------- ---------
Income before income taxes....................... $ (90) $ 589
========= =========
</TABLE>
There have been no differences from the last annual financial statements in the
basis of measuring segment profit or loss. There have been no material changes
in the amount of assets for any operating segment since the last annual
financial statements.
F-24
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
BCS Technologies, Inc.
Englewood, Colorado
We have audited the accompanying balance sheets of BCS Technologies, Inc. as of
July 31, 1997 and 1998, and the related statements of operations, changes in
stockholders' equity and cash flows for the eleven months ended July 31, 1997
and the year ended July 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BCS Technologies, Inc. as of
July 31, 1997 and 1998, and the results of its operations and its cash flows
for the eleven months ended July 31, 1997 and the year ended July 31, 1998 in
conformity with generally accepted accounting principles.
Brock and Company, CPAs, P.C.
Certified Public Accountants
Littleton, Colorado
March 5, 1999
F-25
<PAGE>
BCS Technologies, Inc.
Balance Sheets
<TABLE>
<CAPTION>
-----------------------------------
At July
31,
---------------------- January 31,
1997 1998 1999
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................ $ 927,047 $ 405,991 $1,706,223
Accounts receivable--trade............... 864,921 2,072,926 1,778,375
Inventories.............................. 1,134,171 1,256,656 2,430,023
Prepaid expenses and other current
assets.................................. 104,267 89,954 104,601
Deferred income tax asset................ -- 69,000 69,000
---------- ---------- ----------
Total current assets.................... 3,030,406 3,894,527 6,088,222
Property and equipment, at cost:
Leasehold improvements................... 16,238 19,807 23,264
Machinery and equipment.................. 419,974 495,750 536,043
Furniture and fixtures................... 77,034 96,659 111,587
Computer software........................ 28,530 32,618 59,143
Vehicle.................................. 7,870 7,870 7,870
---------- ---------- ----------
Total property and equipment, at cost... 549,646 652,704 737,907
Less accumulated depreciation............ (309,861) (396,367) (448,975)
---------- ---------- ----------
Net property and equipment.............. 239,785 256,337 288,932
---------- ---------- ----------
Total assets............................ $3,270,191 $4,150,864 $6,377,154
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term debt.......................... $ 102,649 $ 28,254 $ 16,296
Accounts payable......................... 198,169 311,375 152,296
Accounts payable--affiliates............. 140,857 199,849 280,667
Prepaid maintenance contracts............ 253,876 296,182 312,390
Income taxes payable--current............ 17,000 223,000 710,554
Accrued liabilities:
Compensation............................ 100,649 255,671 696,756
Warranty................................ 69,687 54,500 49,472
Other................................... 24,067 20,094 19,518
Current portion of capital lease
obligations............................. 4,661 -- --
---------- ---------- ----------
Total current liabilities............... 911,615 1,388,925 2,237,949
Stockholders' Equity:
Common stock, par value $.000001,
24,386,775 shares authorized, 23,814,706
shares issued and outstanding in 1997
and 1998 and 23,602,242 shares issued in
1999.................................... 24 24 24
Treasury stock, at cost.................. -- -- (138,101)
Additional paid-in capital............... 2,297,660 2,297,660 2,297,660
Retained earnings........................ 60,892 464,255 1,979,622
---------- ---------- ----------
Total stockholders' equity.............. 2,358,576 2,761,939 4,139,205
---------- ---------- ----------
Total liabilities and stockholders'
equity................................. $3,270,191 $4,150,864 $6,377,154
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
BCS Technologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
---------------------------------------------------
Six Months
Eleven Months Year Ended January 31,
Ended July 31, Ended ------------------------
1997 1998 1998 1999
-------------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues................... $3,925,170 $ 6,799,067 $ 2,569,607 $ 7,609,119
Cost of revenues........... 1,537,956 2,466,447 977,223 2,610,679
---------- ----------- ----------- -----------
Gross profit.............. 2,387,214 4,332,620 1,592,384 4,998,440
Operating expenses:
Selling, general and
administrative........... 1,810,346 3,094,742 1,469,497 2,031,203
Research and development.. 235,238 703,833 354,994 667,197
---------- ----------- ----------- -----------
Total operating
expenses................ 2,045,584 3,798,575 1,824,491 2,698,400
---------- ----------- ----------- -----------
Income (loss) from
operations................ 341,630 534,045 (232,107) 2,300,040
Other Income:
Interest income........... 14,279 26,073 13,501 30,327
Gain on sale of
equipment................ 63,111 45 -- --
---------- ----------- ----------- -----------
Total other income....... 77,390 26,118 13,501 30,327
---------- ----------- ----------- -----------
Income (loss) before income
taxes..................... 419,020 560,163 (218,606) 2,330,367
Income tax expense
(benefit)................. 17,000 156,800 (73,500) 815,000
---------- ----------- ----------- -----------
Net income (loss)......... $ 402,020 $ 403,363 $ (145,106) $ 1,515,367
========== =========== =========== ===========
Pro forma information
(unaudited):
Net income before income
taxes.................... $ 419,020
Income tax expense........ 152,000
----------
Pro forma net income...... $ 267,020
==========
Earnings (loss) per common
share:
Basic:....................
Net income (loss)........ $ 0.03 $ 0.02 $ (0.01) $ 0.06
Weighted average number
of common shares........ 8,701,076 23,814,706 23,814,706 23,761,590
Diluted:..................
Net income (loss)........ $ 0.03 $ 0.02 $ (0.01) $ 0.06
Weighted average number
of common shares........ 8,763,810 24,026,252 24,028,289 24,069,877
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE>
BCS Technologies, Inc.
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
------------------------------------------------------
Six Months Ended
Eleven Months Year Ended January 31,
Ended July 31, July 31, ------------------------
1997 1998 1998 1999
-------------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ 402,020 $ 403,363 $ (145,106) $ 1,515,367
Adjustments to
reconcile net income
(loss) to net cash
provided (used) by
operating activities:
Depreciation.......... 43,972 86,907 38,067 52,608
Gain on sale of
equipment............ (63,111) (45) -- --
Increase (decrease)
from changes in assets
and liabilities, net
of effects from
acquisition:
Accounts receivable... 14,037 (1,208,006) (12,847) 294,551
Inventories........... 133,984 (122,484) (20,165) (1,173,367)
Prepaid expenses and
other current as-
sets................. (1,431) 14,313 (45,795) (14,647)
Deferred income tax
asset................ -- (69,000) -- --
Accounts payable...... (208,133) 109,206 (138,804) (176,079)
Accounts payable--
affiliates........... 140,857 62,992 (52,657) 97,818
Prepaid maintenance
contracts............ 73,666 42,306 37,304 16,208
Income taxes payable--
current.............. 17,000 206,000 (17,000) 487,554
Accrued liabilities... (98,865) 135,862 (45,096) 435,481
--------- ----------- --------- -----------
Net cash provided
(used) by operating
activities........... 453,996 (338,586) (402,099) 1,535,494
--------- ----------- --------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Cash received from
acquisition........... 500,000 -- -- --
Proceeds from sale of
equipment............. 75,000 1,644 -- --
Purchases of property
and equipment......... (72,433) (105,058) (56,838) (85,203)
--------- ----------- --------- -----------
Net cash provided
(used) by investing
activities........... 502,567 (103,414) (56,838) (85,203)
--------- ----------- --------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Subchapter S dividend.. (412,000) -- -- --
Loan principal
payments.............. -- (79,056) (29,208) (11,958)
Proceeds from exercise
of stock options...... 18,900 -- -- --
Repurchase of common
stock................. -- -- -- (138,101)
--------- ----------- --------- -----------
Net cash used by
financing
activities........... (393,100) (79,056) (29,208) (150,059)
--------- ----------- --------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 563,463 (521,056) (488,145) 1,300,232
Cash and cash
equivalents, beginning
of period............. 363,584 927,047 927,047 405,991
--------- ----------- --------- -----------
Cash and cash
equivalents, end of
period................ $ 927,047 $ 405,991 $ 438,902 $ 1,706,223
========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
BCS Technologies, Inc.
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Common Stock Treasury Stock Additional
---------------------- ------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
---------- ---------- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 1,
1996................... 74,900 $ 51,300 -- $ -- $ -- $ 596,575 $ 647,875
---------- ---------- -------- --------- ---------- ---------- ----------
Dividends............... -- -- -- -- -- (460,219) (460,219)
Recapitalization of
common stock,
conversion Of
Subchapter S retained
earnings to additional
paid-in capital and
change in par value of
common stock........... 12,850,090 (51,287) -- -- 528,771 (477,484) --
Issuance of common stock
in connection with
merger................. 10,675,850 11 -- -- 1,749,989 -- 1,750,000
Exercise of common stock
purchase options....... 213,866 -- -- -- 18,900 -- 18,900
Net income for the
eleven months ended
July 31, 1997.......... -- -- -- -- -- 402,020 402,020
---------- ---------- -------- --------- ---------- ---------- ----------
Balance, July 31, 1997.. 23,814,706 24 -- -- 2,297,660 60,892 2,358,576
---------- ---------- -------- --------- ---------- ---------- ----------
Net income for the year
ended July 31, 1998.... -- -- -- -- -- 403,363 403,363
---------- ---------- -------- --------- ---------- ---------- ----------
Balance, July 31, 1998.. 23,814,706 24 -- -- 2,297,660 464,255 2,761,939
---------- ---------- -------- --------- ---------- ---------- ----------
Treasury stock purchased
(unaudited)............ (212,464) -- (212,464) (138,101) -- -- (138,101)
Net income for the six
months ended January
31, 1999 (unaudited)... -- -- -- -- -- 1,515,367 1,515,367
---------- ---------- -------- --------- ---------- ---------- ----------
Balance, January 31,
1999 (unaudited)....... 23,602,242 $ 24 (212,464) $(138,101) $2,297,660 $1,979,622 $4,139,205
========== ========== ======== ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements
Year Ended July 31, 1998 and
Unaudited Six Months Ended January 31, 1998 and 1999
1. Organization
Organization
BCS Technologies, Inc. (the "Company") is a corporation formed through a series
of transactions which culminated in a merger between Business Communications
Systems, Inc. and Cortelco, Inc. Cortelco, Inc., Cortelco Systems, Inc. and
Cortelco Systems Holding Corporation are all entities related through common
stock ownership. Business Communications Systems, Inc. was an unrelated
corporation prior to the merger.
On April 1, 1997, Cortelco, Inc., a wholly owned subsidiary of Cortelco
Systems, Inc. in the automatic call distribution products business, was spun
off to the stockholders of Cortelco Systems Holding Corporation. Immediately
afterwards, Cortelco, Inc. was merged with Business Communications Systems,
Inc., the accounting acquiror. Business Communications Systems, Inc. changed
its name to BCS Technologies, Inc.
Description of Business
The Company was originally founded in 1985 and operates from offices in
Englewood, Colorado and a 23,000 square foot facility located in Georgia. The
Company is engaged in the development, sales, manufacturing and distribution of
electronic communication devices throughout the United States.
Business Activities
The Company is a corporation organized under the laws of the State of Delaware
for the purpose of the sale and servicing of electronic communication devices
throughout the United States.
2. Summary of Significant Accounting Policies
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and temporary cash
investments. At times, cash balances held at financial institutions were in
excess of FDIC insurance limits. The Company limits the amount of credit
exposure to any one financial institution. The Company believes no significant
concentration of credit risk exists with respect to these cash investments.
Revenue Recognition
The Company recognizes revenues from system and product sales when title passes
to the customer. Revenues from prepaid maintenance contracts are recognized
ratably over the terms of the contracts. Revenues from the sales of systems
accounted for approximately 32%, 53%, 37%, and 75% for the eleven months ended
July 31, 1997, the year ended July 31, 1998, and the six months ended January
31, 1998 and 1999. The Company generates the remainder of its revenue from
parts sales and system maintenance.
Accounts Receivable
The Company charges off all known uncollectible accounts on a current basis. No
reserve for uncollectible accounts is required, as any accounts which are
considered doubtful are not considered material to the financial statements.
F-30
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
Inventories
The Company uses the lower of first-in, first-out ("FIFO") cost or market in
valuing inventories.
Depreciation
The Company provides for depreciation of property and equipment using straight-
line and accelerated methods for financial and income tax reporting purposes
over the estimated useful lives of the assets, which is generally fifteen years
for leasehold improvements, five years for machinery and equipment, five to
seven years for furniture and fixtures and vehicles and three years for
computer software.
Product Warranties
The Company provides the customer with a warranty from the date of purchase.
Estimated warranty obligations are recorded based on actual claims experience.
Income Taxes
Income tax expense is based on reported income before income taxes. Deferred
income taxes reflect the temporary difference between assets and liabilities
recognized for financial reporting and such amounts recognized for tax purposes
which requires recognition of deferred income tax assets and liabilities.
Deferred income tax assets and liabilities are determined based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recognized if it
is anticipated that some or all of a deferred income tax asset may not be
realized.
Advertising
Advertising costs are charged to operations in the year incurred. The Company
expended $170,426 for the eleven months ended July 31, 1997, $117,912 for the
year ended July 31, 1998, and $43,936 and $57,595 for the six months ended
January 31, 1997 and 1998, respectively.
Interim Financial Statements
The financial statements for the six months ended January 31, 1998 and 1999 are
unaudited, but in the opinion of management, include all adjustments necessary
to fairly state the results therein, such adjustments being of a normal,
recurring nature. Operating results for the six months ended January 31, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending July 31, 1999. All January 31, 1998 and 1999 data presented
in these footnotes is unaudited.
Stock Option Plans
The Company utilizes Statement of Financial Accounting Standards No. 123 (FAS
123), "Accounting for Stock-Based Compensation". The Statement defines a fair
value based method of accounting for stock options or similar equity
instrument. FAS 123 allows an entity to continue to measure compensation cost
for employee stock option plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion (APB) No. 25,
which was elected by the Company. Accordingly, the Company must make certain
pro forma disclosures as if the fair value based method had been applied.
Earnings (Loss) Per Common Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Dilutive earnings per share reflects the potential dilution that
could occur if dilutive securities, stock options, were exercised.
F-31
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
3. Business Acquisition
On April 2, 1997, the Company acquired the net assets of Cortelco, Inc., which
had a fair value of $1,750,000, in exchange for 10,675,850 shares of common
stock. The acquisition was accounted for as a purchase, and the results of CI's
operations were included in the Company's financial statements from the date of
acquisition.
The Company acquired cash of $500,000, accounts receivable of $509,523,
inventory of $1,054,028, prepaid expenses of $70,185, property and equipment of
$183,333, and current liabilities of $567,069 in the purchase of Cortelco, Inc.
The following unaudited pro forma information presents the results of
operations as if the acquisition had occurred at September 1, 1996 and the
Company had revoked its subchapter S election on such date and was taxed as a
Subchapter C corporation for the entire period.
<TABLE>
<CAPTION>
----------
Eleven
months
ended
July 31,
1997
----------
<S> <C>
Revenues........................................................... $ 5,760,814
Net income......................................................... 88,616
Earnings per common share:
Basic and diluted................................................ $ --
</TABLE>
The unaudited pro forma information is not necessarily indicative of the
combined results that would have occurred had the acquisition been effected on
the assumed date, nor is it indicative of the results that may occur in the
future.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
---------------------------------
At
July 31,
--------------------- January 31,
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Raw materials and purchased components...... $ 223,409 $ 224,791 $ 701,036
Finished goods.............................. 910,762 1,031,865 1,728,987
---------- ---------- ----------
Total inventories......................... $1,134,171 $1,256,656 $2,430,023
========== ========== ==========
</TABLE>
5. Short-Term Debt
Short-term debt consists of following:
<TABLE>
<CAPTION>
---------------------------------
At
July 31,
-------------------- January 31,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Amount payable to affiliate--excess of net
worth of CI for the merger with BCS. To be
reduced by any uncollectible receivables,
or other items that would reduce the net
worth of CI at the date of merger.......... $ 54,430 $ 28,254 $ 16,296
Notes payable to stockholder, unsecured and
due on demand.............................. 48,219 -- --
--------- --------- ---------
Total....................................... $ 102,649 $ 28,254 $ 16,296
========= ========= =========
</TABLE>
6. Capitalized Leases
The Company leased certain equipment under long term leases. During the year
ended July 31, 1998 the leases terminated and the Company purchased the
equipment for a nominal cost.
F-32
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
7. Operating Leases and Rent Expense
The Company leases its office facilities in Englewood, Colorado and Dallas,
Texas under noncancellable lease agreements which expire in July 2001 and
December 1998, respectively. Additionally, the Company leases its primary
warehouse facility in Kennesaw, Georgia and certain office equipment under
noncancellable leases.
At July 31, 1998, future minimum lease payments required under the
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
---------
Year Ending
July 31, Amount
- ----------- ---------
<S> <C>
1999................................................................. $ 177,778
2000................................................................. 100,325
2001................................................................. 97,727
---------
Total................................................................ $ 375,830
=========
</TABLE>
Rent expense under all operating leases in effect during the eleven months
ended July 31, 1997 was $148,246, during the year ended July 31, 1998 was
$308,164, and during the six months ended January 31, 1998 and 1999 was
$151,915 and $167,743, respectively.
8. Related Party Transactions
During the eleven months ended July 31, 1997, the year ended July 31, 1998, and
the six months ended January 31, 1998 and 1999, the Company purchased inventory
from affiliates totaling $391,568, $353,023, $366,084, and $966,446,
respectively.
During the year ended July 31, 1998 the Company, through a related party, was
awarded a GSA contract. The contract is invoiced through the related party who
remits the amount collected to the Company when received from the government.
At July 31, 1998 and January 31, 1999 the Company was due $856,259 and
$1,458,799, respectively, from the related party for amounts invoiced on the
contract. These amounts are included in trade accounts receivable at July 31,
1998 and January 31, 1999.
The Company's payable to affiliated companies' stockholders consists of:
<TABLE>
<CAPTION>
---------------------------------
July 31,
-------------------- January 31,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Payable to CSHC.............................. $ 15,814 $ 104,350 $ 330
Payable to CSI............................... 119,542 78,182 26,337
Payable to stockholders...................... 1,501 317 --
--------- --------- ---------
Net accounts payable--affiliates............. $ 136,857 $ 182,849 $ 26,667
========= ========= =========
</TABLE>
9. Employee Savings Plan
Substantially all employees of the Company can participate in the Dean Witter
Reynolds, Inc. Savings Incentive Match Plan, which is qualified under Section
408(p) of the Internal Revenue Code. Under the provisions of the plan, all
participants may contribute the lesser of 100% of their compensation or $6,000.
The Company may contribute a matching contribution equal to the lesser of the
employee contributions or 3% of the employee's compensation. During the eleven
months ended July 31, 1997, the year ended July 31, 1998, and the six months
ended January 31, 1998 and 1999, the Company contributed $7,265, $48,602,
$13,786, and $34,724 to the plan, respectively.
F-33
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
10. Stock Option Plans
The Company currently has three stock option plans. Under the terms of the
first plan, certain employees may purchase common stock of the Company at
prices ranging from $.04 to $.34 per share. This plan is an exchange of options
in the pre-merger company for options in the merged company. The number of
options outstanding under this plan and the number of common shares reserved
for issuance upon the exercise of those options is 558,928.
The other two plans grant certain employees options to purchase common stock of
the Company held by two major stockholders for prices ranging from nominal
amounts to $.65 per share. These options are exercisable upon the achievement
of certain conditions or a lapse of ten years. The number of shares subject to
option under these plans are 1,355,306. The following is a summary of
transactions:
<TABLE>
<CAPTION>
--------------------
Weighted
Average
Exercise
Shares Price
--------- ---------
<S> <C> <C>
Outstanding, September 1, 1996
(None vested).......................................... 7,490 $ 8.01
Granted (weighted average of fair value of $0.03 per
share)................................................ 2,223,162 0.22
Canceled............................................... (174,964) 0.47
Exercised.............................................. (213,866) 0.09
---------
Outstanding, July 31, 1997 (402,072 vested at a weighted
average price
of $0.23 per share)..................................... 1,841,822 0.24
Canceled............................................... (83,144) 0.48
---------
Outstanding, July 31, 1998 (393,928 vested at a weighted
average price
of $0.23 per share)..................................... 1,758,678 0.23
Granted (weighted average fair value of $0.09 per
share)................................................ 290,000 0.37
Canceled............................................... (134,444) 0.0001
---------
Outstanding, January 31, 1999 (444,983 vested at a
weighted average price
of $0.23 per share)..................................... 1,914,234 $ 0.27
=========
</TABLE>
Additional information regarding options outstanding at January 31, 1999 is as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------
Options Outstanding Vested Options
--------------------------------- -----------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Vested Price
- -------- ----------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.0001.................. 480,306 8.1 $ 0.0001 -- $ --
0.04..................... 81,499 2.6 0.04 81,499 0.04
0.14..................... 293,637 2.6 0.14 293,637 0.14
0.25..................... 400,000 8.4 0.25 -- --
0.34..................... 183,792 8.8 0.34 18,792 0.34
0.65..................... 475,000 8.3 0.65 -- --
- ------------------------- --------- --------- --------- ------- ---------
1,914,234 7.2 years $ 0.27 393,328 $ 0.23
========= ========= ========= ======= =========
</TABLE>
Additional Stock Plan Information.
Since the Company continues to account for its stock-based awards to employees
using the intrinsic value method in accordance with APB No. 25, FAS 123,
"Accounting for Stock-Based Compensation," requires the disclosure of pro forma
net income (loss) and earnings (loss) per share had the Company adopted the
fair value method as of the beginning of 1995. Under FAS 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options
F-34
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's fair value calculations on
stock-based awards under the stock plans were made using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life, 8 years from the date of grant in 1997 and 10 years from the date of
grant in 1999; stock volatility, 0% in 1997 and in 1999; risk-free interest
rate, 6.75% in 1997 and 5.0% in 1999 and no dividends during the expected term.
The Company's calculations are based on a single option award valuation
approach, and forfeitures are recognized as they occur. If the computed fair
values of the 1997 and 1999 awards had been amortized to expense over the
vesting period of the awards, the effect on pro forma net income (loss) would
have been insignificant.
11. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
---------------------
At July
31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Current:
Federal.............................................. $ 13,000 $ 218,800
State................................................ 4,000 7,000
Deferred:
Federal.............................................. (34,300) (23,200)
State................................................ (6,800) (4,700)
Valuation allowance.................................. 41,100 (41,100)
--------- ---------
Total income tax expense............................... $ 17,000 $ 156,800
========= =========
</TABLE>
Income tax effects of deferred income tax assets are comprised of the following
future deductible amounts:
<TABLE>
<CAPTION>
---------------------
At July
31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Allowance for warranties and sales returns............... $ 23,200 $ 19,400
Accrued compensated absences............................. 17,900 26,400
Uniform inventory capitalization......................... -- 23,200
--------- ---------
Subtotal................................................. 41,100 69,000
Valuation allowance...................................... (41,000) --
--------- ---------
Net deferred income tax asset............................ $ -- $ 69,000
========= =========
</TABLE>
Prior to April 2, 1997, the Company had elected under Subchapter S of the
Internal Revenue Code to have its income taxed directly to its stockholders.
The 1997 provision for income taxes includes only the taxable income from April
2, 1997 through July 31, 1997. Pro forma net income and earnings per share have
been determined assuming the Company had been taxed under Subchapter C of the
Internal Revenue Code for federal and state purposes for 1997.
The following table reconciles the provision for income taxes at the U.S.
Statutory rate to that in the financial statements for 1998:
<TABLE>
<S> <C>
Income taxes at statutory rate........................................... 34.0%
State income taxes, net of federal benefit............................... 0.1
Uniform inventory capitalization......................................... 4.6
Change in valuation allowance and other.................................. (10.7)
-----
28.0%
=====
</TABLE>
F-35
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
As a result of the merger, the Company has a net operating loss carryforward of
approximately $8,250,000 available to offset Georgia state income taxes. The
financial statements and disclosures do not include recognition of
approximately $495,000 of deferred income tax benefit due to the significant
uncertainty of its future realization.
12. Earnings (Loss) Per Common Share
Outstanding stock options to purchase 1,383,542, 1,364,750, 1,383,542 and
1,489,750 shares of common stock were not included in the computation of
diluted earnings (loss) per common share for the eleven months ended July 31,
1997, the year ended July 31, 1998, and the six months ended January 31, 1998
and 1999. The effect of including the stock options would be antidilutive or
the stock options were exercisable from shares owned by existing stockholders.
A summary of the diluted weighted average number of common shares is as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------
Six Months Ended
January
Eleven Months Year Ended 31,
Ended July 31, July 31, ---------------------
1997 1998 1998 1999
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding.... 8,701,076 23,814,706 23,814,706 23,761,590
Dilutive effect of stock
options...................... 62,734 231,546 213,583 308,287
------------ ---------- ---------- ----------
Diluted weighted average
number of common shares
outstanding.................. 8,763,810 24,046,252 24,028,289 24,069,877
============ ========== ========== ==========
</TABLE>
13. Major Customer
The Company had one major customer which accounted for 22% of revenues for the
year ended July 31, 1998, and 76% of revenues for the six months ended January
31, 1999.
14. Supplemental Cash Flow Information
The Company paid cash for income taxes totaling $17,000 during the year ended
July 31, 1998 and for the six month period ended January 31, 1998. Cash
totaling $327,446 was paid for income taxes during the six months ended
January 31, 1999. No income taxes were paid during the eleven months ended July
31, 1997.
F-36
<PAGE>
Unaudited Pro Forma Consolidated Financial Information
The following pro forma consolidated statements of operations data for the year
ended July 31, 1998 and the six month periods ended January 31, 1998 and 1999
represent the unaudited pro forma operating results as if the acquisition of
BCS Technologies, Inc. had occurred as of August 1, 1997. The following pro
forma consolidated balance sheet data presents the unaudited pro forma
financial condition of the Company as if the acquisition of BCS Technologies,
Inc. had occurred as of January 31, 1999. The pro forma financial data reflects
adjustments to the historical financial statements of Cortelco and BCS
Technologies, Inc., that (1) reflect the purchase method of accounting for the
acquisition of BCS, and (2) eliminate the results of operations and related
assets and liabilities not acquired from the merger with Cortelco Systems
Puerto Rico.
The pro forma, as adjusted, financial information gives effect, additionally,
to (1) the conversion of $686,000 of convertible debt into 1,434,894 shares of
common stock upon the closing of this offering, and (2) this offering and the
uses of proceeds from this offering.
The pro forma financial data does not purport to represent what the company's
financial position or results of operations actually would have been had the
transactions occurred on the dates indicated, or to project the company's
financial position or results of operations at any future date or for any
future period. The following pro forma financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes, BCS Technologies' financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which is included elsewhere.
F-37
<PAGE>
Pro Forma Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
At January 31, 1999
--------------------------------------------------------------------------
Actual
---------------------
Pro Forma
Pro Forma Offering
Adjustments Adjustments Pro Forma
CSI BCS (Note 2) Pro Forma (Note 3) As Adjusted
Dollars in thousands --------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $ 160 $ 1,706 $ $ 1,866
Trade accounts
receivable............. 9,719 1,778 (280)(a) 11,217
Inventories............. 5,386 2,430 (115)(a) 7,701
Other current assets.... 961 174 (126)(b) 1,009
Property and equipment,
net.................... 1,436 289 (660)(b) 1,065
Receivable from related
parties................ 715 715
Other assets............ 1,213 (172)(b) 839
(202)(b)
Goodwill................ 5,188 (f) 5,188
--------- --------- --------- ---------
Total assets.......... $ 19,590 $ 6,377 $ 3,633 $ 29,600
========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Dividends payable....... $ 2,779 $ $ $ 2,779
Current portion of long-
term debt.............. 34 16 (34)(b) 16
Notes payable........... 2,613 2,613
Accounts payable........ 3,849 406 (280)(a) 3,975
Accrued expenses........ 2,042 1,789 3,831
Accounts payable to
related parties........ 2,420 27 2,447
Note payable to parent.. 259 259
Long-term debt.......... 6,023 3,710 (j) 2,313
Minority interest....... 180 180
Preferred stock......... 686 (j) 686
Common stock and paid-in
capital................ 8,328 9,327 (c) 19,553
1,898 (b)
Retained earnings
(deficit).............. (5,753) 4,139 (4,139)(c) (5,868)
(115)(a)
Note receivable from
parent................. (3,184) (3,184)
--------- --------- --------- ---------
Total liabilities and
stockholders'
equity............... $ 19,590 $ 6,377 $ 3,633 $ 29,600
========= ========= ========= =========
</TABLE>
See notes to pro forma consolidated financial statements (unaudited).
F-38
<PAGE>
Pro Forma Consolidated Statement of Operations Data
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------
Year Ended July 31, 1998
---------------------------------------------------------------
Pro Forma
Actual Pro Forma Offering
--------------- Adjustments Adjustments Pro Forma
Dollars in thousands, CSI BCS (Note 2) Pro Forma (Note 3) As Adjusted
except per share data ------- ------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $30,949 $6,799 $(353)(a) $37,395
Cost of revenues........ 18,504 2,466 (322)(a) 20,648
------- ------ ----- -------
Gross profit........... 12,445 4,333 (31) 16,747
Operating expenses:
Selling, general and
administrative......... 10,045 3,095 304 (e) 13,347
-- -- (97)(g) --
Research and
development............ 1,407 704 -- 2,111
Amortization of
goodwill............... -- -- 259 (f) 259
------- ------ ----- -------
Total operating
expenses............. 11,452 3,799 466 15,717
------- ------ ----- -------
Income (loss) from
operations.............. 993 534 (497) 1,030
Interest expense....... 826 -- (327)(h) 499
Management fee
expense, net........... 185 -- -- 185
Other expense
(income), net.......... 61 (26) 478 (d) 513
------- ------ ----- -------
Income (loss) from
continuing operations
before income taxes and
minority interest....... (79) 560 (648) (167)
Income tax expense
(benefit).............. -- 157 (157)(i) --
------- ------ ----- -------
Income (loss) from
operations before
minority interest...... (79) 403 (491) (167)
Minority interest...... (54) -- -- (54)
------- ------ ----- -------
Net income (loss)...... $ (133) $ 403 $(491) $ (221)
======= ====== ===== =======
Net income (loss) per
common share:
Basic.................. $ (0.03) $ (0.03)
Diluted................ $ (0.03) $ (0.03)
</TABLE>
See notes to pro forma consolidated financial statements (unaudited).
F-39
<PAGE>
Pro Forma Consolidated Statement of Operations Data
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Six Months Ended January 31,
-------------------------------------------------------------------------------------------------------
1998 1999
--------------------------------------------------------------- ---------------------------------------
Actual Pro Forma Actual
--------------- Pro Forma Offering --------------- Pro Forma
Dollars in Adjustments Adjustments Pro Forma Adjustments
thousands, except CSI BCS (Note 2) Pro Forma (Note 3) As Adjusted CSI BCS (Note 2) Pro Forma
per share data ------- ------ ----------- --------- ----------- ----------- ------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues....... $15,296 $2,569 $(193)(a) $17,672 $17,482 $7,609 $(894)(a) $24,197
Cost of revenues... 9,143 977 (189)(a) 9,931 10,307 2,611 (779)(a) 12,139
------- ------ ----- ------- --- --- ------- ------ ----- -------
Gross profit...... 6,153 1,592 (4) 7,741 7,175 4,998 (115) 12,058
Operating expenses:
Selling, general,
and
administrative.... 5,147 1,469 152 (e) 6,722 5,237 2,031 152 (e) 7,369
-- -- (46)(g) -- -- -- (51)(g) --
Research and
development....... 679 355 -- 1,034 917 667 -- 1,584
Amortization of
goodwill.......... -- -- 130 (f) 130 -- -- 130 (f) 130
------- ------ ----- ------- --- --- ------- ------ ----- -------
Total operating
expenses........ 5,826 1,824 236 7,886 6,154 2,698 231 9,083
------- ------ ----- ------- --- --- ------- ------ ----- -------
Income (loss) from
operations......... 327 (232) (240) (145) 1,021 2,300 (346) 2,975
Interest
expense........... 425 -- (151)(h) 274 412 -- (183)(h) 229
Management fee
expense, net...... 38 -- -- 38 (10) -- -- (10)
Other expense
(income), net..... (46) (13) 229 (d) 170 30 (30) 258 (d) 258
------- ------ ----- ------- --- --- ------- ------ ----- -------
Income (loss) from
continuing
operations
before income taxes
and minority
interest........... (90) (219) (318) (627) 589 2,330 (421) 2,498
Income tax
expense
(benefit)......... -- (73) -- (73) 70 815 -- 885
------- ------ ----- ------- --- --- ------- ------ ----- -------
Income (loss)
from operations
before minority
interest.......... (90) (146) (318) (554) 519 1,515 (421) 1,613
Minority
interest.......... (62) -- -- (62) (6) -- -- (6)
------- ------ ----- ------- --- --- ------- ------ ----- -------
Net income
(loss)............ $ (152) $ (146) $(318) $ (616) $ 513 $1,515 $(421) $ 1,607
======= ====== ===== ======= === === ======= ====== ===== =======
Net income (loss)
per common share:
Basic............. $ (0.04) $ (0.08) $ 0.13 $ 0.20
Diluted........... $ (0.04) $ (0.08) $ 0.10 $ 0.17
<CAPTION>
Pro Forma
Offering
Dollars in Adjustments Pro Forma
thousands, except (Note 3) As Adjusted
per share data ----------- -----------
<S> <C> <C>
Net revenues.......
Cost of revenues...
----------- -----------
Gross profit......
Operating expenses:
Selling, general,
and
administrative....
Research and
development.......
Amortization of
goodwill..........
----------- -----------
Total operating
expenses........
----------- -----------
Income (loss) from
operations.........
Interest
expense...........
Management fee
expense, net......
Other expense
(income), net.....
----------- -----------
Income (loss) from
continuing
operations
before income taxes
and minority
interest...........
Income tax
expense
(benefit).........
----------- -----------
Income (loss)
from operations
before minority
interest..........
Minority
interest..........
----------- -----------
Net income
(loss)............
=========== ===========
Net income (loss)
per common share:
Basic.............
Diluted...........
</TABLE>
See notes to pro forma consolidated financial statements (unaudited).
F-40
<PAGE>
Notes to Pro Forma Consolidated Financial Information (Unaudited)
1. Basis of Presentation
The pro forma consolidated statements of operations data for the year ended
July 31, 1998 and the six month periods ended January 31, 1998 and 1999
represent the unaudited pro forma operating results as if the acquisition of
BCS Technologies, Inc. ("BCS") had occurred as of August 1, 1997. The pro forma
consolidated balance sheet data presents the unaudited pro forma financial
condition of the Company as if the acquisition of BCS had occurred as of
January 31, 1999. The pro forma financial data reflects adjustments to the
historical financial statements of Cortelco Systems ("the Company") and BCS,
that (1) reflect the purchase method of accounting for the acquisition of BCS,
and (2) eliminate the results of operations and related assets and liabilities
not acquired from the merger with Cortelco Systems Puerto Rico.
The pro forma, as adjusted, financial information gives effect, additionally,
to (1) the conversion of $686,000 of convertible debt into 1,434,894 shares of
common stock upon the closing of the offering, and (2) the offering and the
uses of proceeds thereof.
The pro forma financial data does not purport to represent what the Company's
financial position or results of operations actually would have been had the
transactions occurred on the dates indicated, or to project the Company's
financial position or results of operations at any future date or for any
future period. The following pro forma financial data should be read in
conjunction with Cortelco's consolidated financial statements and related
notes, BCS' financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" which is
included elsewhere.
2. Pro Forma Adjustments
(a) To reflect the elimination of revenues and cost of revenues and balances
between Cortelco Systems, Inc. and BCS .
(b) The following schedule reflects the elimination of the assets and
liabilities of Cortelco Puerto Rico, Inc. that will not be acquired by the
Company.
<TABLE>
<S> <C>
Dollars in thousands
Assets:
Other current assets................................................ $ 126
Deferred financing costs............................................ 172
Building improvements............................................... 660
Income tax refund................................................... 202
Liabilities--Mortgage payable......................................... (3,058)
<CAPTION>
-------
<S> <C>
Net liabilities not assumed/acquired.............................. $(1,898)
<CAPTION>
=======
</TABLE>
(c) To reflect the acquisition of BCS as follows:
The Company issued 3,969,681 common shares for 100% of the common stock of BCS.
At the acquisition date, stockholders of the Company owned 59.02% of the common
stock of BCS. The acquisition of this stock was recorded at the book value of
59.02% of the BCS equity. The remaining 40.98% was recorded based on an
independent valuation of BCS equity. The BCS common equity ownership was valued
at $16,800,000. The total purchase price is computed as follows:
<TABLE>
<S> <C>
Dollars in thousands
Valuation of 100% of the common equity of BCS Technologies, Inc........ $16,800
Percentage of stock owned by non-CSI stockholders...................... 40.98%
<CAPTION>
-------
<S> <C>
Purchase price of common stock of non-CSI stockholders................. $ 6,884
Book value of common stock of BCS owned by CSI stockholders
($4,139,000 x 59.02%)................................................. 2,443
<CAPTION>
-------
<S> <C>
Total purchase price................................................. $ 9,327
<CAPTION>
=======
</TABLE>
(d) To reflect the elimination of rental income related to the building
retained by Cortelco Puerto Rico, Inc. and not acquired by the Company.
F-41
<PAGE>
Notes to Pro Forma Consolidated Financial Information (Unaudited)--(continued)
(e) To reflect the rental expense to be incurred by the Company in connection
with lease agreement negotiated by Cortelco Puerto Rico, Inc. for building
space.
(f) To reflect the goodwill amortization related to the BCS acquisition:
The purchase is allocated (on a preliminary basis) to the assets and
liabilities of BCS as follows:
<TABLE>
<S> <C>
Dollars in thousands
Assets:
Current assets....................................................... $ 6,088
Fixed assets......................................................... 289
Goodwill............................................................. 5,188
Current liabilities.................................................... (2,238)
<CAPTION>
-------
<S> <C>
Net assets acquired................................................ $ 9,327
<CAPTION>
=======
</TABLE>
Goodwill is amortized over a 20 year life, resulting in annual amortization of
$259,000 and six month amortization of $130,000.
(g) To reflect the elimination of the depreciation for building improvements
not acquired from Cortelco Puerto Rico, Inc.
(h) To reflect the elimination of interest expense and amortization of deferred
financing costs related to the mortgage payable not assumed from Cortelco
Puerto Rico, Inc. Interest expense totaled $283,000 for the year ended July 31,
1998 and $129,000 and $153,000 for the six months ended January 31, 1998 and
1999, respectively. The amortization of deferred financing costs totaled
$44,000 for the year ended July 31, 1998 and $22,000 and $30,000 for the six
months ended January 31, 1998 and 1999, respectively.
(i) To eliminate income tax expense for the year ended July 31, 1998 as the
Company would have had a consolidated net loss on a pro forma basis.
(j) The subordinated convertible noteholder converted $686,000 of principal on
the note in exchange for 1,463,206 shares of Series A Preferred on April 12,
1999.
3. Pro Forma Offering Adjustments
(a) To record the proceeds ($ million) from the issuance of shares of the
Company's common stock, net of $ million underwriting discounts and
commissions and estimated offering expenses, including accounting and legal
fees, filing and listing fees and priority expenses.
(b) To record the repayment of $4.3 million in debt from offering proceeds.
(c) To record the conversion of convertible debt of $686,000 into 1,434,894
common shares.
(d) To record the decrease in interest expense, including the amortization of
deferred financing costs, resulting from the repayment of the subordinated note
of $2.3 million and bank debt of $2 million and the conversion of $686,000 of
debt to common stock.
(e) To record the write-off of deferred financing costs and prepayment fees
related to the repayment of $4.3 million of debt.
F-42
<PAGE>
Notes to Pro Forma Consolidated Financial Information (Unaudited)--(continued)
4. Pro Forma Earnings Per Share Data
The computation of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Six Months Ended January 31,
Year Ended ----------------------------------------------
July 31, 1998 1998 1999
----------------------- ----------------------- ----------------------
Pro Forma Pro Forma Pro Forma
Dollars in thousands, Pro Forma As Adjusted Pro Forma As Adjusted Pro Forma As Adjusted
except per share data --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
share:
Income (loss) from
continuing
operations............ $ (221) $ (616) $ 1,607
Weighted average shares
outstanding--basic:
Historical shares
outstanding........... 3,918 3,909 3,920
Stock issued to acquire
BCS................... 3,970 3,970 3,970
Stock issued to pay
dividend declared..... 267 267 267
--------- --------- ---------
Weighted average
shares outstanding--
basic................ 8,155 8,146 8,157
--------- --------- ---------
Basic earnings (loss)
per share............ $ (0.03) $ (0.08) $ 0.20
========= ========= =========
Diluted earnings (loss)
per share:
Income:
Income (loss) from
continuing
operations............ $ (221) $ (616) $ 1,607
Interest on 8%
convertible
subordinated debt..... 55
--------- --------- ---------
Income (loss)
available to common
shareholders......... (221) (616) 1,662
Weighted average
shares--basic.......... 8,155 8,146 8,157
Assumed conversion of 8%
convertible
subordinated debt...... 1,435
Dilutive effect of stock
options................ 152
--------- --------- ---------
Weighted average
shares outstanding--
diluted.............. 8,155 8,146 9,744
--------- --------- ---------
Diluted earnings
(loss) per share..... $ (0.03) $ (0.08) $ 0.17
========= ========= =========
</TABLE>
F-43
<PAGE>
Cortelco Platforms -- Versatile By Design
<TABLE>
<S> <C>
Communications Interface Flexible bus and software architecture provides direct
links to virtually any type of communications device
and to other networked Cortelco platforms.
System Controller Our software takes advantage of a real-time operating
system and the speed and capacity of today's
microprocessors and computer memory.
External Computer Inter- Computer and telephony functions are efficiently
face integrated through standards-based interfaces to the
system controller processors.
</TABLE>
<PAGE>
[LOGO FOR CORTELCO SYSTEMS, INC. APPEARS HERE]
<PAGE>
Part II
Information not required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by Cortelco in connection with the sale of
the common stock being registered. All the amounts shown are estimates except
for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee..................................................... $9,730
NASD filing fee...................................................... *
Nasdaq application fee............................................... *
Blue sky qualification fee and expenses.............................. *
Printing and engraving expenses...................................... *
Legal fees and expenses.............................................. *
Accounting fees and expenses......................................... *
Directors and officers' insurance.................................... *
Transfer agent and registrar fees.................................... *
Miscellaneous........................................................ *
<CAPTION>
<S> <C>
Total................................................................ $ *
<CAPTION>
</TABLE>
- -------------------
* To be supplied by amendment.
Item 14. Indemnification of Officers and Directors.
Under Section 145 of the Delaware General Corporation Law, we have broad powers
to indemnify our directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act.
Our certificate of incorporation provides for the elimination of liability for
monetary damages for breach of the directors' fiduciary duty of care to
Cortelco and its stockholders. These provisions do not eliminate the directors'
duty of care and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to Cortelco, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transaction from which the director derived an
improper personal benefit, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
does not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws.
We expect to enter into agreements with our directors and officers that require
us to indemnify such persons against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred (including expenses of a
derivative action) in connection with any proceeding, whether actual or
threatened, to which any such person may be made a party by reason of the fact
that such person is or was a director or officer of Cortelco or any of its
affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of Cortelco and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this registration statement
provides for indemnification by the underwriters of Cortelco and its officers
and directors for certain liabilities arising under the Securities Act or
otherwise.
Item 15. Recent Sales of Unregistered Securities.
Since April 1996, we have sold and issued the following unregistered
securities:
(1) In July 1997, we issued a convertible promissory note in the aggregate
principal amount of $3,000,000 to ChinaVest IV, L.P.
(2) In August 1997, we sold 95,343 shares of common stock to an investor in
exchange for an interest in the Longhai joint venture.
(3) In April 1999, we issued 3,969,681 shares of common stock to stockholders
of BCS Technologies, Inc. and assumed options covering 94,279 shares of
common stock under the BCS 1977 Incentive Plan in connection with the
acquisition of BCS. We issued 553,880 shares of common stock to Cortelco
Systems Holding Corporation in connection with the merger with Cortelco
Systems Puerto Rico.
II-1
<PAGE>
(4) Since April 1998, we have granted incentive stock options to employees,
directors and consultants under our 1997 Equity Incentive Plan covering an
aggregate of 338,826 shares of common stock, at an average exercise price
of $3.76. No options have been exercised under the 1997 Equity Incentive
Plan.
(5) Since April 1999, we have granted incentive stock options to employees,
directors and consultants under our 1999 Equity Incentive Plan covering an
aggregate of 270,000 shares of common stock, at an average exercise price
of $11.75. No options have been exercised under the 1999 Equity Incentive
Plan.
The sales and issuances of securities in the transactions described in
paragraphs (1) through (3) were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) and/or Regulation D promulgated under
the Securities Act. The purchasers in each case represented their intention to
acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends are affixed to the stock certificates
issued in such transactions. Similar legends were imposed in connection with
any subsequent sales of any such securities. All recipients either received
adequate information about Cortelco or had access, through employment or other
relationships, to such information.
The sales and issuance of securities in the transaction described in paragraphs
(4) and (5) above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
II-2
<PAGE>
Item 16. Exhibits.
(a)
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Cortelco as
currently in effect.
3.2 Amended and Restated Certificate of Incorporation of Cortelco to be in
effect immediately following the closing of the offering.
3.3 Bylaws of Cortelco as currently in effect.
3.4 Amended and Restated Bylaws of Cortelco to be in effect immediately
following the closing of the offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2 Investor Rights Agreement between Cortelco, Cortelco Systems Holding
Corporation and ChinaVest, dated as of July 31, 1997.
4.3 Registration Rights Agreement between CMC Industries, Inc. and
Cortelco, dated as of March 15, 1999.
5.1* Opinion of Cooley Godward LLP.
10.1 Loan and Security Agreement between Cortelco and Foothill Capital
Corporation, dated as July 31, 1997.
10.2 Convertible Subordinated Note issued by Cortelco in favor of ChinaVest
IV, L.P., dated as of July 31, 1997.
10.3 Promissory Note issued by Cortelco Systems Holding Corporation in
favor of Cortelco, dated as of July 31, 1997.
10.4 Promissory Note issued by J. Michael O'Dell in favor of Cortelco,
dated as of November 11, 1997.
10.5 Assumption Agreement between Cortelco Puerto Rico, Inc. and Cortelco
Systems Puerto Rico, Inc., dated as of April 12, 1999, and Loan and
Security Agreement between Cortelco Puerto Rico, Inc. and Foothill
Capital Corporation, dated as August 28, 1997.
10.6 Promissory Note issued by Cortelco Systems Holding Corporation in
favor of BCS Technologies, Inc., dated as of April 13, 1999.
10.7 Form of Indemnity Agreement to be entered into between Cortelco and
its officers and directors.
10.8 Manufacturing Agreement between Cortelco and CMC Manufacturing, Inc.,
dated as of August 1, 1998.
10.9 Lease Agreement between Cortelco and Willow Lake Associates, dated as
of July 24, 1989, as amended on April 6, 1998.
10.10 Industrial Lease Agreement between BCS Technologies, Inc. and
Industrial Developments International (Georgia), L.P., dated as of
March 1, 1999.
10.11 Lease Agreement between Cortelco Systems Puerto Rico, Inc. and
Cortelco Puerto Rico, Inc. dated as of March 1, 1999.
10.12 Employment Agreement, dated as of April 12, 1999, by and between
Cortelco and each of David M. Fredrick and Frank Naso.
10.13 Cortelco's 1999 Equity Incentive Plan and related documents.
10.14 Cortelco's 1999 Employee Stock Purchase Plan and related documents.
11.1 Computation of Net Loss Per Share.
21.1* List of Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Independent Auditors Report on Cortelco Puerto Rico, Inc.
23.4 Consent of Brock and Company, CPA's, P.C.
23.5* Consent of Cooley Godward LLP. (See )
24.1 Power of Attorney. (See page II-5)
27.1 Financial Data Schedule.
</TABLE>
- -------------------
* To be filed by amendment.
(b)
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts S-1
</TABLE>
II-3
<PAGE>
Item 17. Undertakings.
We undertake to provide to the underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of Cortelco
pursuant to the foregoing provisions or otherwise, Cortelco has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Cortelco of expenses
incurred or paid by a director, officer or controlling person of Cortelco in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Cortelco will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
We hereby undertake that: (i) for purposes of determining any liability under
the Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by Cortelco pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time the Commission declared it effective, and (ii) for the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Memphis, State of
Tennessee, on the 26th day of April, 1999.
Cortelco Systems, Inc.
/s/ J. Michael O'Dell
By: ____________________________________
J. Michael O'Dell
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints J. Michael
O'Dell and Stephen N. Samp, his or her true and lawful attorney-in-fact and
agent, each acting alone, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to the Registration Statement on Form S-1, and to any registration statement
filed under Securities and Exchange Commission Rule 462, and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Michael O'Dell President, Chief Executive April 26, 1999
______________________________________ Officer and Director
J. Michael O'Dell (Principal Executive
Officer)
/s/ Stephen N. Samp Vice President of Finance April 26, 1999
______________________________________ and Administration, Chief
Stephen N. Samp Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)
/s/ David S. Lee Chairman of the Board April 26, 1999
______________________________________
David S. Lee
/s/ Stephen R. Bowling Director April 26, 1999
______________________________________
Stephen R. Bowling
/s/ Robert P. Dilworth Director April 26, 1999
______________________________________
Robert P. Dilworth
/s/ W. Frank King Director April 26, 1999
______________________________________
W. Frank King
/s/ Jenny Hsui Theleen Director April 26, 1999
______________________________________
Jenny Hsui Theleen
</TABLE>
II-5
<PAGE>
Cortelco Systems, Inc.
Schedule II--Valuation and Qualifying Accounts
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
Column A Column B Column D Column E
- -------- ---------- Column C ---------- ----------
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996
Allowance for doubtful
accounts and sales
allowance $1,722,136 $1,011,283 $ 668,395 $2,065,024
Warranty reserve 170,373 605,957 447,524 328,806
1997
Allowance for doubtful
accounts and sales
allowance 2,065,024 2,101,157 1,076,419 3,089,762
Warranty reserve 328,806 481,921 470,099 340,628
1998
Allowance for doubtful
accounts and sales
allowance 3,089,762 3,045 1,212,927 1,879,880
Warranty reserve 340,628 231,257 322,275 249,610
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Cortelco as
currently in effect.
3.2 Amended and Restated Certificate of Incorporation of Cortelco to be in
effect immediately following the closing of the offering.
3.3 Bylaws of Cortelco as currently in effect.
3.4 Amended and Restated Bylaws of Cortelco to be in effect immediately
following the closing of the offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2 Investor Rights Agreement between Cortelco, Cortelco Systems Holding
Corporation and ChinaVest, dated as of July 31, 1997.
4.3 Registration Rights Agreement between CMC Industries, Inc. and
Cortelco, dated as of March 15, 1999.
5.1* Opinion of Cooley Godward LLP.
10.1 Loan and Security Agreement between Cortelco and Foothill Capital
Corporation, dated as July 31, 1997.
10.2 Convertible Subordinated Note issued by Cortelco in favor of ChinaVest
IV, L.P., dated as of July 31, 1997.
10.3 Promissory Note issued by Cortelco Systems Holding Corporation in
favor of Cortelco, dated as of July 31, 1997.
10.4 Promissory Note issued by J. Michael O'Dell in favor of Cortelco,
dated as of November 11, 1997.
10.5 Assumption Agreement between Cortelco Puerto Rico, Inc. and Cortelco
Systems Puerto Rico, Inc., dated as of April 12, 1999, and Loan and
Security Agreement between Cortelco Puerto Rico, Inc. and Foothill
Capital Corporation, dated as August 28, 1997.
10.6 Promissory Note issued by Cortelco Systems Holding Corporation in
favor of BCS Technologies, Inc., dated as of April 13, 1999.
10.7 Form of Indemnity Agreement to be entered into between Cortelco and
its officers and directors.
10.8 Manufacturing Agreement between Cortelco and CMC Manufacturing, Inc.,
dated as of August 1, 1998.
10.9 Lease Agreement between Cortelco and Willow Lake Associates, dated as
of July 24, 1989, as amended on April 6, 1998.
10.10 Industrial Lease Agreement between BCS Technologies, Inc. and
Industrial Developments International (Georgia), L.P., dated as of
March 1, 1999.
10.11 Lease Agreement between Cortelco Systems Puerto Rico, Inc. and
Cortelco Puerto Rico, Inc. dated as of March 1, 1999.
10.12 Employment Agreement, dated as of April 12, 1999, by and between
Cortelco and each of David M. Fredrick and Frank Naso.
10.13 Cortelco's 1999 Equity Incentive Plan and related documents.
10.14 Cortelco's 1999 Employee Stock Purchase Plan and related documents.
11.1 Computation of Net Loss Per Share.
21.1* List of Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Independent Auditors Report on Cortelco Puerto Rico, Inc.
23.4 Consent of Brock and Company, CPA's, P.C.
23.5* Consent of Cooley Godward LLP. (See )
24.1 Power of Attorney. (See page II-5)
27.1 Financial Data Schedule.
</TABLE>
- -------------------
* To be filed by amendment.
<PAGE>
Exhibit 3.1
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CORTELCO SYSTEMS, INC.
CORTELCO SYSTEMS, INC. (the "Corporation), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "DGCL"), does hereby certify:
FIRST: The name of the Corporation is Cortelco Systems, Inc. The
Corporation was originally incorporated under the name CTC, Inc. The
Corporation changed its name to Cortelco Investment Corp., and then changed its
name to Cortelco Systems, Inc.
SECOND: The original Certificate of Incorporation was filed by the
Secretary of State of the State of Delaware (the "Secretary of State") on July
23, 1991. An Amended and Restated Certificate of Incorporation was filed by the
Secretary of State on August 30, 1991. A Certificate of Amendment to the
Amended and Restated Certificate of Incorporation was filed by the Secretary of
State on October 30, 1992. A second Amended and Restated Certificate of
Incorporation was filed by the Secretary of State on July 29, 1997.
THIRD: That at a meeting of the Board of Directors of the Corporation,
resolutions were duly adopted setting forth the proposed amendment and
restatement of the Certificate of Incorporation of the Corporation in the form
attached hereto as Exhibit A, declaring said amendment and restatement to be
advisable and submitting such proposed amendment and restatement to the
stockholders of the Corporation for consideration and approval pursuant to the
provisions of the DGCL.
FOURTH: That the Third Amended and Restated Certificate of Incorporation
of Cortelco Systems, Inc. adopted in the manner described herein (the
"Certificate") reads in full as set forth in Exhibit A attached hereto and
incorporated herein by reference as if written herein in its entirety.
SIXTH: That in effecting certain amendments to the second Amended and
Restated Certificate of Incorporation, the outstanding shares of Common Stock
and outstanding rights to acquire Preferred Stock were changed as follows:
Each share of Common Stock of the Corporation issued and outstanding as of
the close of business on the prior day to the filing of this Certificate
will be converted by operation of these presents into the right to receive
one tenth (1/10) of a share of Common Stock. No fractional shares will be
issued, and all fractional shares will be settled by cash payment in an
amount equal to the fractional shares to which
1
<PAGE>
each Holder is entitled times $6.00. Upon surrender to the Corporation of a
certificate representing shares of Common Stock held by a stockholder
immediately prior to the effectiveness of this Certificate of Amendment,
the stockholder shall be entitled to receive in exchange therefor (x) a
certificate representing the number of whole shares of Common Stock and (y)
a check representing the amount of cash in lieu of fractional shares, if
any, such stockholder has the right to receive in respect of the shares of
Common Stock represented by the certificate surrendered pursuant hereto,
and the Certificate so surrendered shall forthwith be canceled.
At and after the effective time of this Certificate, there shall be no
transfers on the stock transfer books of the Corporation of the shares of
Common Stock represented by certificates which were outstanding immediately
prior to the effective time. If, after the effective time, certificates
are presented to the Corporation for transfer, they shall be cancelled and
exchanged for certificates for shares of Common Stock and cash in lieu of
fractional shares, if any, deliverable in respect thereof pursuant hereto.
In the event any certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
certificate to be lost, stolen or destroyed and, if required by the
Corporation, the posting by such person of a bond in such reasonable amount
as the Corporation may direct as indemnity against any claim that may be
made against it with respect to such certificate, the Corporation will
issue in exchange for such lost, stolen or destroyed certificate a
replacement certificate for the shares of Common Stock converted pursuant
hereto and cash in lieu of fractional shares deliverable pursuant hereto.
At the time of filing of this Certificate, no shares of Preferred Stock of
the Corporation were issued or outstanding, but 14,632,062 shares of Series
A Preferred Stock, par value $.0001 per share, were reserved for issuance
upon conversion at the option of the holder of that certain $3,000,000
aggregate principal amount Convertible Promissory Note dated July 31, 1997
made by the Corporation and payable to ChinaVest IV, L.P. After the time
of filing of this Certificate, 1,463,206 shares of Preferred Stock shall be
designated Series A Preferred Stock having the designations, privileges,
preferences, limitations and relative rights set forth in the Certificate,
and all such shares shall be reserved for issuance but none shall be
outstanding.
SEVENTH: That pursuant to Section 228 of the DGCL, the holders of Common
Stock comprising more than 80% of the aggregate voting power of all shares of
Common Stock of the Company, which exceeds the minimum number of shares required
to vote in favor of the foregoing amendment and restatement at a special
meeting, duly executed and delivered to the Company at its principal offices a
written consent setting forth the adoption of the foregoing amendment. The
manner for implementation for any exchange, reclassification, or cancellation of
issued shares is set forth in the text of the Amendment in Item FOURTH above.
2
<PAGE>
EIGHTH: That this Third Amended and Restated Certificate of Incorporation
was duly adopted in accordance with the provisions of Sections 242 and 245 of
the DGCL.
IN WITNESS WHEREOF, Cortelco Systems, Inc. has caused this certificate to
be signed by Michael O'Dell, its authorized officer, this 5th day of April,
1999.
Cortelco Systems, Inc.
By: /s/ Michael O'Dell
-----------------------------------------------
Michael O'Dell,
President and Chief Executive Officer
3
<PAGE>
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CORTELCO SYSTEMS, INC.
Exhibit A
FIRST: The name of the corporation is Cortelco Systems, Inc.
SECOND: The name of the Corporation's registered agent and the address of
the Corporation's registered office in the State of Delaware are:
The Corporation Trust Company
1209 Orange Street
City of Wilmington, County of New Castle, Delaware 19801
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which Corporations may be organized under the Delaware General
Corporation Law.
FOURTH:
Authorized Stock. The total number of shares of stock which the
----------------
Corporation shall have authority to issue is 60,000,000 shares, divided into
50,000,000 shares of common stock of the par value of $.001 per share, and
10,000,000 shares of preferred stock of the par value of $.001 per share.
Authorization, Designation and Issuance of Preferred Stock. The Board of
----------------------------------------------------------
Directors is authorized, subject to limitations prescribed by law and the
provisions of this Article FOURTH, to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following:
(A) The number of shares constituting that series and the distinctive
designation of that series;
(B) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that series;
4
<PAGE>
(C) Whether that series shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting rights;
(D) Whether that series shall have conversion privileges, and, if so, the
terms and conditions of such conversion, including provision for adjustment of
the conversion rate in such events as the Board of Directors shall determine;
(E) Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the date or date upon
or after which they shall be redeemable, and the amount per share payable in
case of redemption, which amount may vary under different conditions and at
different redemption dates;
(F) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(G) The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, and the
relative rights of priority, if any, of payment of shares of that series;
(H) Any other relative rights, preferences and limitations of that series.
Designation of Series A Preferred Stock: Of the authorized shares of
---------------------------------------
Preferred Stock of the Corporation, 1,463,206 shares are hereby designated
Series A Preferred Stock having the following designations, powers, preferences,
limitations, qualifications, restrictions and relative rights:
1. DIVIDEND RIGHTS. The holders of the then outstanding shares of Series A
Preferred shall be entitled to receive dividends pari passu, on an as-converted
basis, with the holders of Common upon payment of any dividend on the Common
payable other than in Common or other securities and rights convertible into or
entitling the holder thereof to receive, directly or indirectly, additional
shares of Common.
2. LIQUIDATION PREFERENCE.
(A) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the Series A
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common by reason of their ownership thereof and in proportion to
the liquidation preference of any other outstanding series of Preferred, an
amount per share equal to the Conversion Price (as defined in Section 3 below)
(as adjusted for any stock dividends, combinations or splits with respect to
such stock), plus all accrued or declared but unpaid dividends on such stock for
each share of Series A Preferred then held by such holders. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred and the holders of any other outstanding
series of Preferred shall be insufficient to permit the payment to such holders
of the full aforesaid preferential amount, then the entire assets and funds of
the Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred and any other outstanding series
5
<PAGE>
of Preferred in proportion to the preferential amount each such holder is
otherwise entitled to receive.
(B) After payment to the holders of the Series A Preferred and any other
outstanding series of Preferred Stock of the amounts set forth in Section 2(a)
above, the entire remaining assets and funds of the Corporation legally
available for distribution, if any, shall be distributed among the holders of
the Common and the Series A Preferred and any other outstanding series of
Preferred in proportion to the shares of Common then held by them and the shares
of Common which they then have the right to acquire upon conversion of the
shares of Series A Preferred and any other outstanding series of Preferred then
held by them.
(C) For purposes of this Section 2, (i) any acquisition of the Corporation
by means of merger or other form of corporate reorganization in which
outstanding stock of the Corporation is exchanged for securities or other
consideration issued, or caused to be issued, by the acquiring corporation or
its subsidiary (other than a mere reincorporation transaction) or (ii) a sale of
all or substantially all of the assets of the Corporation, shall be treated as a
liquidation, dissolution or winding up of the Corporation and shall entitle the
holders of Series A Preferred and any other outstanding series of Preferred and
Common to receive at the closing in cash, securities or other property (valued
as provided in Section 2(d) below) amounts as specified in Section 2(a) and 2(b)
above.
(D) Whenever the distribution provided for in this Section 2 shall be
payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other
property.
3. CONVERSION OF SERIES A PREFERRED. The holders of the Series A Preferred
shall have conversion rights as follows (the "Series A Conversion Rights"):
(A) SPECIAL DEFINITIONS. For purposes of this Section 3, the following
definitions shall apply:
(i) "SERIES A CONVERSION PRICE" shall mean the price at which shares
of Common shall be deliverable upon conversion of the Series A Preferred. The
Series A Conversion Price shall be determined as set forth in Section 3(b). The
Series A Conversion Price shall be subject to adjustment from time to time as
provided for in Sections 4(f), 4(g) and 4(b).
(ii) "CONVERSION CALCULATION DATE" shall mean July 31, 1998; provided,
however, that if on such date the Corporation is pursuing an initial public
offering or a merger or similar event which would result in the exchange of the
Series A Preferred or substantially all the assets of the Corporation for cash
or publicly traded securities, the "Conversion Calculation Date" shall mean the
date one hundred eighty (180) days following such date.
(B) DETERMINATION OF SERIES A CONVERSION PRICE. On the Conversion
Calculation Date, the Series A Conversion Price shall be calculated using the
following formula:
6
<PAGE>
X = Y
------------
34,141,483
Where X = the Series A Conversion Price, and
Y = 8 multiplied by the Corporation's audited net income for the
twelve (12) month period ending July 31, 1998.
(C) RIGHT TO CONVERT. Each share of Series A Preferred shall be convertible
at the option of the holder thereof, without payment of additional
consideration, at any time upon or after the Conversion Calculation Date at the
office of the Corporation or any transfer agent for the Series A Preferred into
such number of fully paid and nonassessable shares of Common, as is determined
by dividing the Series A Conversion Price calculated on the Conversion
Calculation Date by the Series A Conversion Price in effect at the time of
conversion (the "Series A Conversion Rate").
(D) AUTOMATIC CONVERSION. Each share of Series A Preferred shall
automatically be converted into shares of Common based on the then effective
Series A Conversion Rate immediately prior to the closing of a firm commitment
underwritten public offering of shares of Common pursuant to an affective
registration statement under the Securities Act of 1933, as amended (the "Act").
(E) MECHANICS OF CONVERSION. No fractional shares of Common shall be issued
upon conversion of Series A Preferred. In lieu of any fractional shares to which
the holder would otherwise be entitled, such fractional amount shall be rounded
to the nearest whole share. Before any holder of Series A Preferred shall be
entitled to convert the same into shares of Common, it shall surrender its
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series A Preferred and shall give
written notice to the Corporation at such office that it elects to convert the
same (except that no such written notice of election to convert shall be
necessary in the event of an automatic conversion pursuant to Section 3(d)). The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred a certificate or certificates,
registered in such names as are specified by the holder, for the number of
shares of Common to which such holder shall be entitled as aforesaid. Except to
the extent otherwise provided in Section 3(d) with respect to automatic
conversion, such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of Series A
Preferred to be converted, and the person or persons entitled to receive the
shares of Common issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common on such date.
(F) ADJUSTMENTS OF SUBDIVISIONS, DIVIDENDS, COMBINATIONS OR CONSOLIDATIONS
OF COMMON.
(i) In the event the outstanding shares of Common shall be combined or
consolidated, by reclassification or otherwise, into a lesser number of
shares of Common, the Series A Conversion Price in effect immediately prior
to such combination or consolidation shall,
7
<PAGE>
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
(ii) In the event the Corporation shall declare or pay any dividend on
the Common payable in Common or in the event the outstanding shares of Common
shall be subdivided, by reclassification or otherwise than by payment of a
dividend in Common, into a greater number of shares of Common, the Series A
Conversion Price in effect immediately prior to such dividend or subdivision
shall be proportionately decreased:
(A) in the case of any such dividend, immediately after the close
of business on the record date for the determination of holders of any class of
securities entitled to receive such dividend, or
(B) in the case of any such subdivision, at the close of business
on the date immediately prior to the date upon which such corporate action
becomes effective.
If such record date shall have been fixed and such dividend shall not have
been fully paid on the date fixed therefor, the adjustment previously made in
the Series A Conversion Price which became effective on such record date shall
be canceled as of the close of business on such record date, and thereafter the
Series A Conversion Price shall be adjusted as of the time of actual payment of
such dividend.
(G) OTHER DISTRIBUTIONS. In the event the Corporation at any time or from
time to time makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, any distribution payable in securities of the
Corporation other than the shares of Common Stock and other than as otherwise
adjusted for in this Section 3, then and in each such event provision shall be
made so that the holders of Series A Preferred shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of securities of the Corporation which they would have
received had their Series A Preferred been converted into Common Stock on the
date of such event and had they thereafter, during the period from the date of
such event to and including the date of conversion, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 3 with respect to
the rights of the holders of the Preferred Stock.
(H) RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Common Stock
issuable upon conversion of the Series A Preferred shall be changed into the
same or a different number of shares of any other class or classes of stock,
whether by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares provide for above), the Series A Conversion
Price then in effect shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted such that the
Series A Preferred shall be convertible into, in lieu of the number of shares of
Common Stock which the holders would otherwise have been entitled to receive, a
number of shares of such other class or classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by the
holders upon conversion of such Series A Preferred as applicable, immediately
before that change.
8
<PAGE>
(I) NO IMPAIRMENT. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series A Preferred against impairment.
The Corporation shall from time to time in accordance with the laws of the
State of Delaware increase the authorized number of shares of Common if at any
time the number of shares of Common remaining unissued and available for
issuance shall not be sufficient to permit conversion of all of the Series A
Preferred as provided for in this Section 3.
(J) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of the determination
of and each subsequent adjustment or readjustment of the Series A Conversion
Price pursuant to this Section 3, the Corporation shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Series A Preferred a certificate setting forth such adjustment or
readjustment and showing the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the written request at any time of any holder
of Series A Preferred, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments; (ii) the
Series A Conversion Price at the time in effect; and (iii) the number of shares
of Common and the amount, if any, of other property which at the time would be
received upon the conversion of the Series A Preferred, as applicable.
(K) NOTICES OF RECORD DATE. In the event that this Corporation shall
propose at any time:
(i) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series or
other rights;
(iii) to effect any reclassification or recapitalization of its
Common shares outstanding involving a change in the Common shares; or
(iv) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up; then, in connection with each such event, this
Corporation shall send to the holder of the Series A Preferred;
(A) at least 10 days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (iii) and (iv) above; and
9
<PAGE>
(B) in the case of the matters referred to in (iii) and (iv) above, at
least 10 days' prior written notice of the date when the same shall take place
(and specifying, if practicable, or estimating the date on which the holders of
Common shall be entitled to exchange their Common shares for securities or other
property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of Series A Preferred at the address for each
such holder as shown on the books of this Corporation.
(L) ISSUE TAXES. The Corporation shall pay any and all issue and other
taxes (other than income taxes) that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of shares of Series A Preferred
pursuant thereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(M) VOTING RIGHTS; DIRECTORS
(I) Each holder of shares of the Series A Preferred shall be
entitled to the number of votes equal to the number of shares of Common into
which such shares of Series A Preferred are convertible on the record date for
the vote, and shall have voting rights and powers equal to the voting rights and
powers of the Common (except as otherwise expressly provided herein or as
required by law), voting together with the Common as a single class and shall be
entitled to notice of any stockholders' meeting in accordance with the Bylaws of
the Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Series A Preferred held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward). Each holder of Common shall be entitled to one (1) vote for
each share of Common held.
(II) VOTING FOR ELECTION OF DIRECTORS. The holders of the Series A
Preferred shall be entitled, voting separately as a single class, to elect one
(1) member of the Board of Directors and to remove from office such director and
to fill any vacancy caused by the resignation, death or removal of such
director. The holders of the Common shall be entitled, voting separately as a
single class, to elect two (2) members of the Board of Directors and to remove
from office such directors and to fill any vacancy caused by the resignation,
death or removal of such directors. The remaining members of the Board of
Directors will be elected by the approval of the holders of eighty-five percent
(85%) the Common and Series A Preferred, voting together as a single class.
(III) In the case of any vacancy in the office of a director occurring
among a director elected by the holder of Series A Preferred pursuant to Section
3(m)(ii), such vacancy may be filled by the affirmative vote of the holders of a
majority of the shares of Series A Preferred given either at a special meeting
of such stockholders duly called for that purpose or pursuant to a written
consent of such stockholders. Any director who shall have been elected by the
holders of Series A Preferred may be removed during the aforesaid term of
office, either with or without cause, by, and only by, the affirmative vote of
the holders of a majority of the shares
10
<PAGE>
of the Series A Preferred given either a special meeting of such stockholders
duly called for that purpose or pursuant to a written consent of such
stockholders, and any vacancy thereby created may be filled by the holders of
Series A Preferred represented as such meeting or pursuant to such written
consent.
4. RESIDUAL RIGHTS. All rights accruing to the outstanding shares of this
Corporation not expressly provided for to the contrary herein shall be vested in
the Common.
5. PROTECTIVE PROVISIONS. The Corporation shall not amend its Certificate of
Incorporation without the approval, by vote or written consent, by the holders
of a majority of the Series A Preferred, voting as a class, if such amendment
would change any of the rights, preferences or privileges provided for herein
for the benefit of any shares of the Series A Preferred. Amendments to the
Certificate of Incorporation to increase the authorized Common in connection
with the Corporation's initial public offering shall not constitute a change in
any of the rights, preferences or privileges of the Series A Preferred.
FIFTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation and regulation
of the powers of the Corporation, of its directors and of its stockholders or
any class thereof, as the case may be, it is further provided that:
1. The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors.
2. The Board of Directors may from time to time make, amend, supplement or
repeal the Bylaws; provided, however, that the stockholders may change or repeal
any Bylaw adopted by the Board of Directors by the affirmative vote of the
holders of a majority of the voting power of all of the then outstanding shares
of the capital stock of the Corporation (considered for this purpose as one
class); and, provided further, that no amendment or supplement to the Bylaws
adopted by the Board of Directors shall vary or conflict with any amendment or
supplement thus adopted by the stockholders.
3. The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
SIXTH: A director of the Corporation shall, to the full extent not
prohibited by the Delaware General Corporation Law, as the same exists or may
hereafter be amended, not be liable to the Corporation or its stockholders for
monetary damages for breach of his or her fiduciary duty as a director.
SEVENTH: The Corporation is to have perpetual existence.
EIGHT: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute of this Certificate of
Incorporation, and all rights conferred upon the stockholders herein are granted
subject to this right.
11
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CORTELCO SYSTEMS, INC.
J. MICHAEL O'DELL hereby certifies that:
1. The original name of this corporation is CTC, Inc. and the date of filing
the original Certificate of Incorporation of this corporation with the
Secretary of State of the State of Delaware is July 23, 1991.
2. He is the duly elected and acting President of Cortelco Systems, Inc., a
Delaware corporation.
3. The Certificate of Incorporation of this corporation is hereby amended and
restated to read as follows:
I.
The name of this corporation is Cortelco Systems, Inc. (the "Corporation").
II.
The address of the registered office of the Corporation in the State of
Delaware is:
The Prentice-Hall Corporation System, Inc.
1013 Centre Road
Wilmington, Delaware 19805
County of New Castle
The name of the Corporation's registered agent at said address is The
Prentice-Hall Corporation System, Inc.
III.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
IV.
A. AUTHORIZED STOCK. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue is
60,000,000 shares. 50,000,000 shares shall be Common Stock, each having a par
value of one-tenth of one cent ($0.001). 10,000,000 shares shall be Preferred
Stock, each having a par value of one-tenth of one cent ($0.001).
1.
<PAGE>
B. PREFERRED STOCK. The Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is hereby authorized, by filing a
certificate (a "Preferred Stock Designation") pursuant to the Delaware General
Corporation Law ("DGCL"), to fix or alter from time to time the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions of any wholly unissued series of
Preferred Stock, and to establish from time to time the number of shares
constituting any such series or any of them; and to increase or decrease the
number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. BOARD OF DIRECTORS.
1. POWERS. The management of the business and the conduct of the
affairs of the corporation shall be vested in its Board of Directors.
2. NUMBER OF DIRECTORS. The number of directors which shall
constitute the whole Board of Directors shall be fixed exclusively by one or
more resolutions adopted by the Board of Directors.
3. ELECTION OF DIRECTORS. Subject to the rights of the holders of
any series of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the initial public offering pursuant to
an effective registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), covering the offer and sale of Common Stock to the public (the
"Initial Public Offering"), the directors shall be divided into three classes
designated as Class I, Class II and Class III, respectively. Directors shall be
assigned to each class in accordance with a resolution or resolutions adopted by
the Board of Directors. At the first annual meeting of stockholders following
the closing of the Initial Public Offering, the term of office of the Class I
directors shall expire and Class I directors shall be elected for a full term of
three years. At the second annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class II directors
shall expire and Class II directors shall be elected for a full term of three
years. At the third annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
2.
<PAGE>
Notwithstanding the foregoing provisions of this section, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
4. REMOVAL OF DIRECTORS.
A. Neither the Board of Directors nor any individual director
may be removed without cause.
B. Subject to any limitation imposed by law, any individual
director or directors may be removed with cause by the holders of a majority of
the voting power of the corporation entitled to vote at an election of
directors.
5. VACANCIES.
A. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
B. If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
DGCL.
B.
1. BYLAW AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then-outstanding shares of the voting stock of the
corporation entitled to vote. The Board of Directors shall also have the power
to adopt, amend, or repeal Bylaws.
2. ELECTION OF DIRECTORS BY WRITTEN BALLOT. The directors of the
corporation need not be elected by written ballot unless the Bylaws so provide.
3.
<PAGE>
3. ACTION BY WRITTEN CONSENT OF THE STOCKHOLDERS. No action shall be
taken by the stockholders of the corporation except at an annual or special
meeting of stockholders called in accordance with the Bylaws or by written
consent of stockholders in accordance with the Bylaws prior to the closing of
the Initial Public Offering and following the closing of the Initial Public
Offering no action shall be taken by the stockholders by written consent.
4. NOTICE OF MEETINGS. Advance notice of stockholder nominations for
the election of directors and of business to be brought by stockholders before
any meeting of the stockholders of the corporation shall be given in the manner
provided in the Bylaws of the corporation.
VI.
A. DIRECTOR LIABILITY. The liability of the directors for monetary
damages shall be eliminated to the fullest extent under applicable law.
B. MODIFICATIONS TO INDEMNIFICATION PROVISIONS. Any repeal or
modification of this Article VI shall be prospective and shall not affect the
rights under this Article VI in effect at the time of the alleged occurrence of
any act or omission to act giving rise to liability or indemnification.
VII.
A. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the voting stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
* * *
4. This Amended and Restated Certificate of Incorporation has been duly
approved by the Board of Directors of this Corporation.
5. This Amended and Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware by the Board of
Directors and the stockholders of the Corporation. The total number of
outstanding shares entitled to vote or act by written
4.
<PAGE>
consent was 9,081,695 shares of Common Stock and 1,463,206 shares of Series
A Preferred stock. The number of shares voting in favor of the amendment
and restatement equaled or exceeded the vote required. Such vote approved
this Amended and Restated Certificate of Incorporation by written consent
in accordance with Section 228 of the General Corporation Law of the State
of Delaware and written notice of such was given by the Corporation in
accordance with said Section 228.
5.
<PAGE>
IN WITNESS WHEREOF, Cortelco Systems, Inc. has entered this Amended and
Restated Certificate of Incorporation to be signed by its President in Palo
Alto, California, this _______________, 1999.
CORTELCO SYSTEMS, INC.
By: ____________________________
J. Michael O'Dell
President
6.
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
CORTELCO INVESTMENT CORP.
(a Delaware corporation)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I.
Offices
Section 1. Registered Office..................................................................... 1
Section 2. Other Offices......................................................................... 1
ARTICLE II.
Corporate Seal
Section 3. Corporate Seal........................................................................ 1
ARTICLE III.
Stockholders' Meetings
Section 4. Place of Meetings..................................................................... 1
Section 5. Annual Meeting........................................................................ 1
Section 6. Special Meetings...................................................................... 1
Section 7. Notice of Meetings.................................................................... 2
Section 8. Quorum................................................................................ 2
Section 9. Adjournment and Notice of Adjourned Meetings.......................................... 2
Section 10. Voting Rights......................................................................... 3
Section 11. Beneficial Owners of Stock............................................................ 3
Section 12. List of Stockholders.................................................................. 3
Section 13. Action without Meeting................................................................ 4
ARTICLE IV.
Directors
Section 15. Number and Term of Office............................................................. 4
Section 16. Powers................................................................................ 4
Section 17. Vacancies............................................................................. 4
Section 18. Resignation........................................................................... 5
Section 19. Removal............................................................................... 5
Section 20. Meetings.............................................................................. 5
Section 21. Quorum and Voting..................................................................... 6
Section 22. Action without Meeting................................................................ 6
Section 23. Fees and Compensation................................................................. 6
Section 24. Committees............................................................................ 7
</TABLE>
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 25. Organization......................................................................... 8
ARTICLE V.
Officers
Section 26. Officers Designated.................................................................. 8
Section 27. Tenure and Duties of Officers........................................................ 8
Section 28. Delegation of Authority.............................................................. 10
Section 29. Resignations......................................................................... 10
Section 30. Removal.............................................................................. 10
ARTICLE VI.
Execution of Corporate Instruments and Voting
of Securities Owned by the Corporation
Section 31. Execution of Corporate Instruments................................................... 10
Section 32. Voting of Securities Owned by the Corporation........................................ 11
ARTICLE VII.
Shares of Stock
Section 33. Form and Execution of Certificates................................................... 11
Section 34. Lost Certificates.................................................................... 11
Section 35. Transfers............................................................................ 12
Section 36. Fixing Record Dates.................................................................. 12
Section 37. Registered Stockholders.............................................................. 13
ARTICLE VIII.
Other Securities of the Corporation
Section 38. Execution of Other Securities........................................................ 13
ARTICLE IX.
Dividends
Section 39. Declaration of Dividends............................................................. 13
Section 40. Dividend Reserve..................................................................... 14
ARTICLE X.
Fiscal Year
Section 41. Fiscal Year.......................................................................... 14
ARTICLE XI.
Indemnification
</TABLE>
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 42. Indemnification of Directors, Officers, Employees and Other Agents.................... 14
ARTICLE XII.
Notices
Section 43. Notices............................................................................... 17
ARTICLE XIII.
Amendments
Section 44. Amendments............................................................................ 19
ARTICLE XIV.
Loans to Officers
Section 45. Loans to Officers..................................................................... 19
ARTICLE XV.
Miscellaneous
Section 46. Annual Report......................................................................... 20
</TABLE>
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
CORTELCO INVESTMENT CORP.
(a Delaware corporation)
ARTICLE I
Offices
-------
Section 1. Registered Office. The registered office of the
-----------------
corporation in the State of Delaware shall be in the City of Dover, County of
Kent. [Del. Code Ann., tit. 8, (S)131]
Section 2. Other Offices. The corporation shall also have and
-------------
maintain an office or principal place of business in Memphis, Tennessee, at such
place as may be fixed by the Board of Directors, and may also have offices at
such other places, both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require. [Del. Code Ann., tit. 8, (S)122(8)]
ARTICLE II
Corporate Seal
--------------
Section 3. Corporate Seal. At the discretion of the Board of
--------------
Directors, the corporation shall have a corporate seal which shall consist of a
die bearing the name of the corporation and the inscription, "Corporate Seal
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise. [Del. Code Ann., tit. 8,
(S)122 (3)]
ARTICLE III
Stockholders' Meetings
----------------------
Section 4. Place of Meetings. Meetings of the stockholders of the
-----------------
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof. [Del. Code Ann., tit. 8, (S)211(a)]
Section 5. Annual Meeting. The annual meeting of the stockholders of
--------------
the corporation, for the purpose of election of Directors and for such other
business as may lawfully come before it, shall be held on such date and at such
time as may be designated from time to time by the Board of Directors. [Del.
Code Ann., tit. 8, (S)211(b)]
1.
<PAGE>
Section 6. Special Meetings. Special meetings of the stockholders of
----------------
the corporation may be called, for any purpose or purposes, by (a) the Chairman
of the Board, (b) the President, (c) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board for adoption, or (d)
by the holders of shares entitled to cast not less than ten percent (10%) of the
votes at the meeting, and shall be held at such place, on such date, and at such
time as they or he shall fix; provided, however, that following registration of
any of the classes of equity securities of the corporation pursuant to the
provisions of the Securities Exchange Act of 1934, as amended, special meetings
of the stockholders may only be called by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized Directors.
Section 7. Notice of Meetings. Except as otherwise provided by law
------------------
or the Certificate of Incorporation, written notice of each meeting of
stockholders shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each stockholder entitled to vote at such
meeting, such notice to specify the place, date and hour and purpose or purposes
of the meeting. Notice of the time, place and purpose of any meeting of
stockholders may be waived, in writing, signed by the person entitled to notice
thereof, either before or after such meeting, and will be waived by any
stockholder by his attendance thereat in person or by proxy, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Any stockholder so waiving notice of such
meeting shall be bound by the proceedings of any such meeting in all respects as
if due notice thereof had been given. [Del. Code Ann., tit. 8, (S)(S)222, 229]
Section 8. Quorum. At all meetings of stockholders, except where
------
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. Any shares, the voting of
which at said meeting has been enjoined, or which for any reason cannot be
lawfully voted at such meeting, shall not be counted to determine a quorum at
such meeting. In the absence of a quorum any meeting of stockholders may be
adjourned, from time to time, by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting at which a quorum
is present may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
action taken by the holders of a majority of the voting power represented at any
meeting at which a quorum is present shall be valid and binding upon the
corporation; provided, however, that Directors shall be elected by a plurality
of the votes of the shares present in person or represented by proxy at the
meeting and entitled to vote on the election of Directors. Where a separate
vote by a class or classes is required, a majority of the outstanding shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and the affirmative vote of the majority (plurality, in the case of the
election of Directors) of shares of such class or classes present in person or
represented by proxy at the meeting shall be the act of such class. [Del. Code
Ann., tit. 8, (S)216]
2.
<PAGE>
Section 9. Adjournment and Notice of Adjourned Meetings. Any meeting
--------------------------------------------
of stockholders, whether annual or special, may be adjourned from time to time
by the vote of a majority of the shares represented thereat. When a meeting is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact any
business which might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting. [Del. Code Ann., tit. 8, (S)222 (c)]
Section 10. Voting Rights. For the purpose of determining those
-------------
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Except
as may be otherwise provided in the Certificate of Incorporation or these
Bylaws, each stockholder shall be entitled to one vote for each share of capital
stock held by such stockholder. Every person entitled to vote or execute
consents shall have the right to do so either in person or by an agent or agents
authorized by a written proxy executed by such person or his duly authorized
agent, which proxy shall be filed with the Secretary at or before the meeting at
which it is to be used. An agent so appointed need not be a stockholder. No
proxy shall be voted after three (3) years from its date of creation unless the
proxy provides for a longer period. All elections of Directors shall be by
written ballot, unless otherwise provided in the Certificate of Incorporation.
[Del. Code Ann., tit. 8, (S)(S)211(e), 212(b)]
Section 11. Beneficial Owners of Stock. (a) If shares or other
--------------------------
securities having voting power stand of record in the names of two (2) or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, tenants by the entirety, or otherwise, or if two (2) or more persons
have the same fiduciary relationship respecting the same shares, unless the
Secretary is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1)
votes, the act of the majority so voting binds all; (c) if more than one (1)
votes, but the vote is evenly split on any particular matter, each faction may
vote the securities in question proportionally, or may apply to the Delaware
Court of Chancery for relief as provided in the General Corporation Law of
Delaware, Section 217(b). If the instrument filed with the Secretary shows that
any such tenancy is held in unequal interests, a majority or even-split for the
purpose of this subsection (c) shall be a majority or even-split in interest.
[Del. Code Ann., tit. 8, (S)217(b)]
(b) Persons holding stock in a fiduciary capacity shall be entitled
to vote the shares so held. Persons whose stock is pledged shall be entitled to
vote, unless in the transfer by the pledgor on the books of the corporation he
has expressly empowered the pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent such stock and vote thereon. [Del. Code
Ann., tit. 8, (S)217(a)]
Section 12. List of Stockholders. The Secretary shall prepare and
--------------------
make, at least ten (10) days before every meeting of stockholders, a complete
list of the stockholders entitled to
3.
<PAGE>
vote at said meeting, arranged in alphabetical order, showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not specified, at the place where the meeting is
to be held. The list shall be produced and kept at the time and place of meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. [Del. Code Ann., tit. 8, (S)219(a)]
Section 13. Action without Meeting. (a) Any action required by
----------------------
statute to be taken at any annual or special meeting of the stockholders, or any
action which may be taken at any
************MISSING PAGE 5*************
Section 14. ***
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies, and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless, and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
ARTICLE IV
Directors
---------
Section 15. Number and Term of Office. The number of Directors which
-------------------------
shall constitute the whole of the Board of Directors shall be five (5). The
number of authorized Directors may be modified from time to time by amendment of
this Section 15 in accordance with the provisions of Section 44 hereof. Except
as provided in Section 17, the Directors shall be elected by the stockholders at
their annual meeting in each year and shall hold office until the next annual
meeting and until their successors shall be duly elected and qualified.
Directors need not be stockholders unless so required by the Certificate of
Incorporation. If for any cause the Directors shall not have been elected at an
annual meeting, they may be elected as soon thereafter as convenient at a
special meeting of the stockholders called for that purpose in the manner
provided in these Bylaws. [Del. Code Ann., tit. 8, (S)(S)141(b), 211(b), (c)]
Section 16. Powers. The powers of the corporation shall be
------
exercised, its business conducted and its property controlled by the Board of
Directors, except as may be otherwise provided by statute or by the Certificate
of Incorporation [Del. Code Ann., tit. 8, (S)141(a) ]
4.
<PAGE>
Section 17. Vacancies. Unless otherwise provided in the Certificate
---------
of Incorporation, vacancies and newly created directorships resulting from any
increase in the authorized number of Directors may be filled by a majority of
the Directors then in office, although less than a quorum, or by a sole
remaining Director, and each Director so elected shall hold office for the
unexpired portion of the term of the Director whose place shall be vacant and
until his successor shall have been duly elected and qualified. A vacancy in
the Board of Directors shall be deemed to exist under this Section 17 in the
case of the death, removal or resignation of any Director, or if the
stockholders fail at any meeting of stockholders at which Directors are to be
elected (including any meeting referred to in Section 19 below) to elect the
number of Directors then constituting the whole Board of Directors. [Del. Code
Ann., tit. 8, (S)223(a), (b)]
Section 18. Resignation. Any Director may resign at any time by
-----------
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When
one or more Directors shall resign from the Board of Directors, effective at a
further date, a majority of the Directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified. [Del. Code Ann., tit. 8,
(S)(S)141(b) , 223 (d)]
Section 19. Removal. At a special meeting of stockholders called for
-------
the purpose in the manner hereinabove provided, subject to any limitations
imposed by law or the Certificate of Incorporation, the Board of Directors, or
any individual Director, may be removed from office, with or without cause, and
a new Director or Directors elected by a vote of stockholders holding a majority
of the outstanding shares entitled to vote at an election of Directors. [Del.
Code Ann., tit. 8, (S)141(k)]
Section 20. Meetings.
--------
(a) Annual Meetings. The annual meeting of the Board of Directors
---------------
shall be held immediately after the annual meeting of stockholders and at the
place where such meeting is held. No notice of an annual meeting of the Board
of Directors shall be necessary and such meeting shall be held for the purpose
of electing officers and transacting such other business as may lawfully come
before it.
(b) Regular Meetings. Except as hereinafter otherwise provided,
----------------
regular meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been determined by the Board of Directors. [Del. Code
Ann., tit. 8, (S)141(g)]
(c) Special Meetings. Unless otherwise restricted by the Certificate
----------------
of Incorporation, special meetings of the Board of Directors may be held at any
time and place
5.
<PAGE>
within or without the State of Delaware whenever called by the President or a
majority of the Directors. [Del. Code Ann., tit. 8, (S)141(g)]
(d) Telephone Meetings. Any member of the Board of Directors, or of
------------------
any committee thereof,, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting. [Del. Code
Ann., tit. 8, (S)141(i)]
(e) Notice of Meetings. Written notice of the time and place of all
------------------
special meetings of the Board of Directors shall be given at least one (1) day
before the date of the meeting. Notice of any meeting may be waived in writing
at any time before or after the meeting and will be waived by any Director by
attendance thereat, except when the Director attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. [Del. Code
Ann., tit. 8, (S)229]
(f) Waiver of Notice. The transaction of all business at any meeting
----------------
of the Board of Directors, or any committee thereof, however called or noticed,
or wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the Directors not present shall sign a written waiver of
notice, or a consent to holding such meeting, or an approval of the minutes
thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting. [Del. Code
Ann., tit. 8, (S)229]
Section 21. Quorum and Voting. (a) Unless the Certificate of
-----------------
Incorporation requires a greater number and except with respect to
indemnification questions arising under Section 42 hereof, for which a quorum
shall be one-third (1/3) of the exact number of Directors fixed from time to
time in accordance with Section 15 hereof, but not less than one (1), a quorum
of the Board of Directors shall consist of a majority of the exact number of
Directors fixed from time to time in accordance with Section 15 of these Bylaws,
but not less than one (1); provided, however, at any meeting whether a quorum be
present or otherwise, a majority of the Directors present may adjourn from time
to time until the time fixed for the next regular meeting of the Board of
Directors, without notice other than by announcement at the meeting. [Del. Code
Ann., tit. 8, (S)141(b)]
(b) At each meeting of the Board of Directors at which a quorum is
present all questions and business shall be determined by a vote of a majority
of the Directors present, unless a different vote be required by law, the
Certificate of Incorporation or these Bylaws. [Del. Code Ann., tit. 8,
(S)141(b)]
Section 22. Action without Meeting. Unless otherwise restricted by
----------------------
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and such
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee. [Del. Code Ann., tit. 8, (S)141(f)]
6.
<PAGE>
Section 23. Fees and Compensation. Directors shall be entitled to
---------------------
such compensation for their services as may be approved by the Board of
Directors, including, if so approved, by resolution of the Board of Directors, a
fixed sum and expenses of attendance, if any, for attendance at each regular or
special meeting of the Board of Directors and at any meeting of a committee of
the Board of Directors. Nothing herein contained shall be construed to preclude
any Director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor. [Del. Code
Ann., tit. 8, (S)141(h)]
Section 24. Committees.
----------
(a) Executive Committee. The Board of Directors may by resolution
-------------------
passed by a majority of the whole Board of Directors, appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and specifically granted by
the Board of Directors, shall have and may exercise when the Board of Directors
is not in session all powers of the Board of Directors in the management of the
business and affairs of the corporation, including, without limitation, the
power and authority to declare a dividend or to authorize the issuance of stock,
except such committee shall not have the power or authority to amend the
Certificate of Incorporation, to adopt an agreement of merger or consolidation,
to recommend to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, to recommend to the
stockholders of the corporation a dissolution of the corporation or a revocation
of a dissolution or to amend these Bylaws. [Del. Code Ann., tit. 8, (S)141(c)]
(b) Other Committees. The Board of Directors may, by resolution
----------------
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors, and shall have such powers and perform such duties as
may be prescribed by the resolution or resolutions creating such committees, but
in no event shall such committee have the powers denied to the Executive
Committee in these Bylaws. [Del. Code Ann., tit. 8, (S)141(c)]
(c) Term. The members of all committees of the Board of Directors
----
shall serve a term coexistent with that of the Board of Directors which shall
have appointed such committee. The Board of Directors, subject to the
provisions of subsections (a) or (b) of this Section 24, may at any time
increase or decrease the number of members of a committee or terminate the
existence of a committee. The membership of a committee member shall terminate
on the date of his death or voluntary resignation from the committee or from the
Board of Directors. The Board of Directors may at any time for any reason
remove any individual committee member and the Board of Directors may fill any
committee vacancy created by death, resignation, removal or increase in the
number of members of the committee. The Board of Directors may designate one or
more Directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member. [Del. Code Ann., tit. 8, (S)141 (c)]
7.
<PAGE>
(d) Meetings. Unless the Board of Directors shall otherwise provide,
--------
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 24 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any Director who is a member of such
committee, upon written notice to the members of such committee of the time and
place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of
any committee may be waived in writing at any time before or after the meeting
and will be waived by any Director by attendance thereat, except when the
Director attends such special meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized number
of members of any such committee shall constitute a quorum for the transaction
of business, and the act of a majority of those present at any meeting at which
a quorum is present shall be the act of such committee. [Del. Code Ann., tit.
8, (S)(S)141(c), 229]
Section 25. Organization. At every meeting of the Directors, the
------------
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the Directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.
ARTICLE V
Officers
--------
Section 26. Officers Designated. The officers of the corporation
-------------------
shall be the Chairman of the Board of Directors, the President, one or more Vice
Presidents, the Secretary and the Chief Financial Officer or Treasurer, all of
whom shall be elected at the annual organizational meeting of the Board of
Directors. The order of the seniority of the Vice Presidents shall be in the
order of their nomination, unless otherwise determined by the Board of
Directors. The Board of Directors may also appoint one or more Assistant
Secretaries, Assistant Treasurers, and such other officers and agents with such
powers and duties as it shall deem necessary. The Board of Directors may assign
such additional titles to one or more of the officers as it shall deem
appropriate. Any one person may hold any number of offices of the corporation
at any one time unless specifically prohibited therefrom by law. The salaries
and other compensation of the officers of the corporation shall be fixed by or
in the manner designated by the Board of Directors. [Del. Code Ann., tit. 8,
(S)(S)122(5), 142(a), (b) ]
Section 27. Tenure and Duties of Officers.
-----------------------------
(a) General. All officers shall hold office at the pleasure of the
-------
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any
8.
<PAGE>
time by the Board of Directors. If the office of any officer becomes vacant for
any reason, the vacancy may be filled by the Board of Directors. [Del. Code
Ann., tit. 8, (S)141(b), (e) ]
(b) Duties of Chairman of the Board of Directors. The Chairman of the
--------------------------------------------
Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 27. [Del. Code Ann., tit. 8, (S)142(a)]
(c) Duties of President. The President shall preside at all meetings
-------------------
of the stockholders and at all meetings of the Board of Directors, unless the
Chairman of the Board of Directors has been appointed and is present. The
President shall be the Chief Executive Officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the corporation. The
President shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time. [Del. Code Ann., tit. 8,
(S)142(a)]
(d) Duties of Vice Presidents. The Vice Presidents, in the order of
-------------------------
their seniority, may assume and perform the duties of the President in the
absence or disability of the President or whenever the office of President is
vacant. The Vice Presidents shall perform other duties commonly incident to
their office and shall also perform such other duties and have such other powers
as the Board of Directors or the President shall designate from time to time.
[Del. Code Ann., tit. 8, (S)142(a)]
(e) Duties of Secretary. The Secretary shall attend all meetings of
-------------------
the stockholders and of the Board of Directors, and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders,
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time. [Del. Code Ann., tit. 8, (S)142 (a) ]
(f) Duties of Chief Financial Officer or Treasurer. The Chief
----------------------------------------------
Financial Officer or Treasurer shall keep or cause to be kept the books of
account of the corporation in a thorough and proper manner, and shall render
statements of the financial affairs of the corporation in such form and as often
as required by the Board of Directors or the President. The Chief Financial
Officer or Treasurer, subject to the order of the Board of Directors, shall have
the custody of all funds and securities of the corporation. The Chief Financial
Officer or Treasurer
9.
<PAGE>
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time. The President may direct any
Assistant Treasurer to assume and perform the duties of the Chief Financial
Officer or Treasurer in the absence or disability of the Chief Financial Officer
or Treasurer, and each Assistant Treasurer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. [Del. Code Ann., tit. 8, (S)142(a)]
Section 28. Delegation of Authority. The Board of Directors may from
-----------------------
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
Section 29. Resignations. Any officer may resign at any time by
------------
giving written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer. [Del. Code Ann., tit. 8, (S)142(b)]
Section 30. Removal. Any officer may be removed from office at any
-------
time, either with or without cause, by the vote or written consent of a majority
of the Directors in office at the time, or by any committee or superior officers
upon whom such power of removal may have been conferred by the Board of
Directors.
ARTICLE VI
Execution of Corporate Instruments and Voting
----------------------------------------------
of Securities Owned by the Corporation
--------------------------------------
Section 31. Execution of Corporate Instruments. The Board of
----------------------------------
Directors may, in its discretion, determine the method and designate the
signatory officer or officers, or other person or persons, to execute on behalf
of the corporation any corporate instrument or document, or to sign on behalf of
the corporation the corporate name without limitation, or to enter into
contracts on behalf of the corporation, except where otherwise provided by law
or these Bylaws, and such execution or signature shall be binding upon the
corporation. [Del. Code Ann., tit. 8, (S)(S)103(a), 142(a), 158]
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, or the President or any Vice President, and by the
Secretary or Chief Financial Officer or Treasurer or any Assistant Secretary or
Assistant Treasurer. All other instruments and documents requiring the
corporate signature, but not requiring the corporate seal, may be executed as
aforesaid or in such other manner as may be directed by the Board of Directors.
[Del. Code Ann., tit. 8, (S)(S)103(a), 142(a), 158]
10.
<PAGE>
All checks and drafts drawn on banks or other depositaries on funds to
the credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount. [Del. Code
Ann., tit. 8, (S)(S)103(a), 142(a), 158]
Section 32. Voting of Securities Owned by the Corporation. All stock
---------------------------------------------
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the President, or any Vice President.
[Del. Code Ann., tit. 8, (S)123]
ARTICLE VII
Shares of Stock
---------------
Section 33. Form and Execution of Certificates. Certificates for the
----------------------------------
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Where such certificate is countersigned by a transfer agent
other than the corporation or its employee, or by a registrar other than the
corporation or its employee, any other signature on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the designations,
preferences, limitations, restrictions on transfer and relative rights of the
shares authorized to be issued. [Del. Code Ann., tit. 8, (S)158]
Section 34. Lost Certificates. A new certificate or certificates
-----------------
shall be issued in place of any certificate or certificates theretofore issued
by the corporation alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen, or destroyed. The corporation may require, as a
condition precedent to the issuance of a new certificate or certificates, the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
or to give the corporation a surety bond in such form and amount as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen, or destroyed.
[Del. Code Ann., tit. 8, (S)167]
11.
<PAGE>
Section 35. Transfers. (a) Transfers of record of shares of stock of
---------
the corporation shall be made only upon its books by the holders thereof, in
person or by attorney duly authorized, and upon the surrender of a properly
endorsed certificate or certificates for a like number of shares. [Del. Code
Ann., tit. 8, (S)201; Del. Code Ann., Tit. 6, article 8 subtit. I]
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware. [Del. Code Ann., tit. 8,
(S)160 (a)]
Section 36. Fixing Record Dates. (a) In order that the corporation
-------------------
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, the Board of Directors may fix, in
advance, a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty (60) nor less than ten (10) days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of records entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix, in advance, a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors, and which date shall not be more than ten (10) days
after the date upon which the resolution fixing the record date is adopted by
the Board of Directors. If no record date has been fixed by the Board of
Directors, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is required by law, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in the State
of Delaware, its principal place of business or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
12.
<PAGE>
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. [Del. Code Ann., tit. 8, (S)213]
Section 37. Registered Stockholders. The corporation shall be
-----------------------
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware. [Del. Code Ann., tit. 8, (S)(S)213(a), 219]
ARTICLE VIII
Other Securities of the Corporation
-----------------------------------
Section 38. Execution of Other Securities. All bonds, debentures and
-----------------------------
other corporate securities of the corporation, other than stock certificates
(covered in Section 33), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal (if any) impressed
thereon or a facsimile of such seal, imprinted thereon and attested by the
signature of the Secretary or an Assistant Secretary, or the Chief Financial
Officer or Treasurer or an Assistant Treasurer; provided, however, that where
any such bond, debenture or other corporate security shall be authenticated by
the manual signature of a trustee under an indenture pursuant to which such
bond, debenture or other corporate security shall be issued, the signatures of
the persons signing and attesting the corporate seal on such bond, debenture or
other corporate security may be the imprinted facsimile of the signatures of
such persons. Interest coupons appertaining to any such bond, debenture or
other corporate security, authenticated by a trustee as aforesaid, shall be
signed by the Treasurer or an Assistant Treasurer of the corporation or such
other person as may be authorized by the Board of Directors, or bear imprinted
thereon the facsimile signature of such person. In case any officer who shall
have signed or attested any bond, debenture or other corporate security, or
whose facsimile signature shall appear thereon or on any such interest coupon,
shall have ceased to be such officer before the bond, debenture or other
corporate security so signed or attested shall have been delivered, such bond,
debenture or other corporate security nevertheless may be adopted by the
corporation and issued and delivered as though the person who signed the same or
whose facsimile signature shall have been used thereon had not ceased to be such
officer of the corporation.
ARTICLE IX
Dividends
---------
Section 39. Declaration of Dividends. Dividends upon the capital
------------------------
stock of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation. [Del. Code Ann., tit. 8, (S)(S)170, 173]
13.
<PAGE>
Section 40. Dividend Reserve. Before payment of any dividend, there
----------------
may be set aside out of any funds of the corporation available for dividends
such sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created. [Del.
Code Ann., tit. 8, (S)171]
ARTICLE X
Fiscal Year
-----------
Section 41. Fiscal Year. The fiscal year of the corporation shall be
-----------
fixed by resolution of the Board of Directors.
ARTICLE XI
Indemnification
---------------
Section 42. Indemnification of Directors, Officers, Employees and
-----------------------------------------------------
Other Agents.
- ------------
(a) Directors and Executive Officers. The corporation shall indemnify
--------------------------------
its Directors and executive officers to the fullest extent not prohibited by the
Delaware General Corporation Law; provided, however, that the corporation may
-------- -------
limit the extent of such indemnification by individual contracts with its
Directors and executive officers; and, provided, further, that the corporation
-------- -------
shall not be required to indemnify any Director or executive officer in
connection with any proceeding (or part thereof) initiated by such person or any
proceeding by such person against the corporation or its Directors, officers,
employees or other agents unless (i) such indemnification is expressly required
to be made by law, (ii) the proceeding was authorized by the Board of Directors
of the corporation, or (iii) such indemnification is provided by the
corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law.
(b) Other Officers Employees and Other Agents. The corporation shall
-----------------------------------------
have power to indemnify its other officers, employees and other agents as set
forth in the Delaware General Corporation Law.
(c) Good Faith. (i) For purposes of any determination under this
----------
Bylaw, a Director or executive officer shall be deemed to have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that his conduct was
unlawful, if his action is based on information, opinions, reports and
statements, including financial statements and other financial data, in each
case prepared or presented by:
(A) one or more officers or employees of the corporation whom the
Director or executive officer believed to be reliable and competent in
the matters presented;
14.
<PAGE>
(B) counsel, independent accountants or other persons as to
matters which the Director or executive officer believed to be within
such person's professional competence; and
(C) with respect to a Director, a committee of the Board upon
which such Director does not serve, as to matters within such
committee's designated authority, which committee the Director
believes to merit confidence; so long as, in each case, the Director
or executive officer acts without knowledge that would cause such
reliance to be unwarranted.
(ii) The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal proceeding, that he had reasonable cause to believe that his
conduct was unlawful.
(iii) The provisions of this paragraph (c) shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the
Delaware General Corporation Law.
(d) Expenses. The corporation shall advance, prior to the final
--------
disposition of any proceeding, promptly following request therefor, all expenses
incurred by any Director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation if a
determination is reasonably and promptly made (1) by the Board of Directors by a
majority vote of a quorum consisting of Directors who were not parties to the
proceeding, or (2) if such quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, that the facts known to the decision making party at the time
such determination is-made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation.
(e) Enforcement. Without the necessity of entering into an express
-----------
contract, all rights to indemnification and advances to Directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the Director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a Director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. The corporation shall be entitled to raise as a
defense to any
15.
<PAGE>
such action that the claimant has not met the standards of conduct that make it
permissible under the Delaware General Corporation Law for the corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Delaware
General Corporation Law, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
(f) Non-Exclusivity of Rights. The rights conferred on any person by
-------------------------
this bylaw shall not be exclusive of any other right which such person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
Directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its Directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.
(g) Survival of Rights. The rights conferred on any person by this
------------------
Bylaw shall continue as to a person who has ceased to be a Director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
(h) Insurance. To the fullest extent permitted by the Delaware
---------
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.
(i) Amendments. Any repeal or modification of this Bylaw shall only
----------
be prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(j) Saving Clause. If this Bylaw or any portion hereof shall be
-------------
invalidated on any grounds by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each Director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law.
(k) Certain Definitions. For the purposes of this Bylaw, the
-------------------
following definitions shall apply:
(i) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation,
prosecution, defense, settlement, arbitration and appeal of, and the
giving of testimony in, any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative.
16.
<PAGE>
(ii) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness
fees, fines, amounts paid in settlement or judgment and any other
costs and expenses of any nature or kind incurred in connection with
any proceeding.
(iii) The term the "corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, and employees or
agents, so that any person who is or was a director, officer, employee
or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the
provisions of this Bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
(iv) References to a "director," "officer," "employee," or
"agent" of the corporation shall include, without limitation,
situations where such person is serving at the request of the
corporation as a director, officer, employee, trustee or agent of
another corporation, partnership, joint venture, trust or other
enterprise.
(v) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and
references to serving at the request of the corporation" shall include
any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to
the best interests of the corporation" as referred to in this Bylaw.
ARTICLE XII
Notices
-------
Section 43. Notices.
-------
(a) Notice to Stockholders. Whenever, under any provisions of these
----------------------
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock record
of the corporation or its transfer agent. [Del. Code Ann., tit. 8, (S)222]
17.
<PAGE>
(b) Notice to Directors. Any notice required to be given to any
-------------------
Director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such Director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such Director.
(c) Address Unknown. If no address of a stockholder or Director be
---------------
known, notice may be sent to the office of the corporation required to be
maintained pursuant to Section 2 hereof.
(d) Affidavit of Mailing. An affidavit of mailing, executed by a duly
--------------------
authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
Director or Directors, to whom any such notice or notices was or were given, and
the time and method of giving the same shall be conclusive evidence of the
statements therein contained. [Del. Code Ann., tit. 8, (S)222]
(e) Time Notices Deemed Given. All notices given by mail, as above
-------------------------
provided, shall be deemed to have been given as at the time of mailing and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at time of transmission.
(f) Methods of Notice. It shall not be necessary that the same method
-----------------
of giving notice be employed in respect of all Directors, but one permissible
method may be employed in respect of any one or more, and any other permissible
method or methods may be employed in respect of any other or others.
(g) Failure to Receive Notice. The period or limitation of time
-------------------------
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any Director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such Director to receive such
notice.
(h) Notice to Person with Whom Communication Is Unlawful. Whenever
----------------------------------------------------
notice is required to be given, under any provision of law or of the Certificate
of Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action
or meeting which shall be taken or held without notice to any such person with
whom communication is unlawful shall have the same force and effect as if such
notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
18.
<PAGE>
(i) Notice to Person with Undeliverable Address. Whenever notice is
-------------------------------------------
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve (12) month period have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph. [Del. Code Ann., tit. 8, (S)230]
ARTICLE XIII
Amendments
----------
Section 44. Amendments. Except as otherwise set forth in paragraph
----------
(i) of Section 42 of these Bylaws, these Bylaws may be amended or repealed and
new Bylaws adopted by the stockholders entitled to vote. The Board of Directors
shall also have the power, if such power is conferred upon the Board of
Directors by the Certificate of Incorporation, to adopt, amend or repeal Bylaws
(including, without limitation, the amendment of any Bylaw setting forth the
number of Directors who shall constitute the whole Board of Directors). [Del.
Code Ann., tit. 8, (S)(S)109(a), 122 (6)]
ARTICLE XIV
Loans to Officers
-----------------
Section 45. Loans to Officers. The corporation may lend money to, or
-----------------
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in this Section 45 shall be
deemed to deny, limit or restrict the powers of guaranty or warranty of the
corporation at common law or under any statute. [Del. Code Ann., tit. 8,
(S)143]
19.
<PAGE>
ARTICLE XV
Miscellaneous
-------------
Section 46. Annual Report. (a) Subject to the provisions of Section
-------------
46(b) below, the Board of Directors shall cause an annual report to be sent to
each stockholder of the corporation not later than one hundred twenty (120) days
after the close of the corporation's fiscal year. Such report shall include a
balance sheet as of the end of such fiscal year and an income statement and
statement of changes in financial position for such fiscal year, accompanied by
any report thereon of independent accountants or, if there is no such report,
the certificate of an authorized officer of the corporation that such statements
were prepared without audit from the books and records of the corporation. Such
report shall be sent to stockholders at least fifteen (15) days prior to the
next annual meeting of stockholders after the end of the fiscal year to which it
relates.
(b) If and so long as there are fewer than 100 holders of record of
the corporation's share, the requirement of sending of an annual report to the
stockholders of the corporation is hereby expressly waived.
20.
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BYLAWS
OF
CORTELCO SYSTEMS, INC.
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I OFFICES........................................................ 1
Section 1. Registered Office......................................... 1
Section 2. Other Offices............................................. 1
ARTICLE II CORPORATE SEAL................................................. 1
Section 3. Corporate Seal............................................ 1
ARTICLE III STOCKHOLDERS' MEETINGS......................................... 1
Section 4. Place Of Meetings......................................... 1
Section 5. Annual Meetings........................................... 1
Section 6. Special Meetings.......................................... 4
Section 7. Notice Of Meetings........................................ 4
Section 8. Quorum.................................................... 5
Section 9. Adjournment And Notice Of Adjourned Meetings.............. 5
Section 10. Voting Rights............................................. 6
Section 11. Joint Owners Of Stock..................................... 6
Section 12. List Of Stockholders..................................... 6
Section 13. Action Without Meeting................................... 6
Section 14. Organization............................................ 7
ARTICLE IV DIRECTORS................................................... 8
Section 15. Number And Term Of Office............................... 8
Section 16. Powers.................................................. 8
Section 17. Classes of Directors.................................... 8
Section 18. Vacancies............................................... 8
Section 19. Resignation............................................. 9
Section 20. Removal................................................. 9
Section 21. Meetings................................................ 9
Section 22. Quorum And Voting....................................... 10
Section 23. Action Without Meeting.................................. 11
Section 24. Fees And Compensation................................... 11
Section 25. Committees.............................................. 11
</TABLE>
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 26. Organization............................................ 12
ARTICLE V OFFICERS.................................................... 12
Section 27. Officers Designated..................................... 12
Section 28. Tenure And Duties Of Officers........................... 13
Section 29. Delegation Of Authority................................. 14
Section 30. Resignations............................................ 14
Section 31. Removal................................................. 14
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES
OWNED BY THE CORPORATION.................................... 14
Section 32. Execution Of Corporate Instruments...................... 14
Section 33. Voting Of Securities Owned By The Corporation........... 15
ARTICLE VII SHARES OF STOCK............................................. 15
Section 34. Form And Execution Of Certificates...................... 15
Section 35. Lost Certificates....................................... 16
Section 36. Transfers............................................... 16
Section 37. Fixing Record Dates..................................... 16
Section 38. Registered Stockholders................................. 17
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION......................... 17
Section 39. Execution Of Other Securities........................... 17
ARTICLE IX DIVIDENDS................................................... 18
Section 40. Declaration Of Dividends................................ 18
Section 41. Dividend Reserve........................................ 18
ARTICLE X FISCAL YEAR................................................. 18
Section 42. Fiscal Year............................................. 18
ARTICLE XI INDEMNIFICATION............................................. 19
Section 43. Indemnification Of Directors, Executive Officers,
Other Officers, Employees And Other Agents.............. 19
ARTICLE XII NOTICES..................................................... 22
Section 44. Notices................................................. 22
ARTICLE XIII AMENDMENTS.................................................. 23
</TABLE>
ii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 45. Amendments.............................................. 23
ARTICLE XIV LOANS TO OFFICERS........................................... 24
Section 46. Loans To Officers....................................... 24
</TABLE>
iii.
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
CORTELCO SYSTEMS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation in
the State of Delaware shall be in the City of Wilmington, County of New Castle.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the Board
of Directors, and may also have offices at such other places, both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETINGS.
(A) The annual meeting of the stockholders of the corporation, for the
purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors. Nominations of persons for election
to the Board of Directors of the corporation and the proposal
1.
<PAGE>
of business to be considered by the stockholders may be made at an annual
meeting of stockholders: (i) pursuant to the corporation's notice of meeting of
stockholders; (ii) by or at the direction of the Board of Directors; or (iii) by
any stockholder of the corporation who was a stockholder of record at the time
of giving of notice provided for in the following paragraph, who is entitled to
vote at the meeting and who complied with the notice procedures set forth in
Section 5.
(B) At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. For
nominations or other business to be properly brought before an annual meeting by
a stockholder pursuant to clause (c) of Section 5(a) of these Bylaws, (i) the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation, (ii) such other business must be a proper matter for
stockholder action under the General Corporation Law of Delaware, (iii) if the
stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided the corporation with a Solicitation Notice (as
defined in this Section 5(b)), such stockholder or beneficial owner must, in the
case of a proposal, have delivered a proxy statement and form of proxy to
holders of at least the percentage of the corporation's voting shares required
under applicable law to carry any such proposal, or, in the case of a nomination
or nominations, have delivered a proxy statement and form of proxy to holders of
a percentage of the corporation's voting shares reasonably believed by such
stockholder or beneficial owner to be sufficient to elect the nominee or
nominees proposed to be nominated by such stockholder, and must, in either case,
have included in such materials the Solicitation Notice, and (iv) if no
Solicitation Notice relating thereto has been timely provided pursuant to this
section, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this Section 5. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the ninetieth (90/th/) day nor earlier than the close of business on
the one hundred twentieth (120/th/) day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced more than thirty (30) days prior to or
delayed by more than thirty (30) days after the anniversary of the preceding
year's annual meeting, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the one hundred twentieth
(120/th/) day prior to such annual meeting and not later than the close of
business on the later of the ninetieth (90/th/) day prior to such annual meeting
or the tenth (10/th/) day following the day on which public announcement of the
date of such meeting is first made. In no event shall the public announcement of
an adjournment of an annual meeting commence a new time period for the giving of
a stockholder's notice as described above. Such stockholder's notice shall set
forth: (A) as to each person whom the stockholder proposed to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "1934 Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (B) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting
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and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the corporation's books, and of such beneficial
owner, (ii) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder and such beneficial owner, and
(iii) whether either such stockholder or beneficial owner intends to deliver a
proxy statement and form of proxy to holders of, in the case of the proposal, at
least the percentage of the corporation's voting shares required under
applicable law to carry the proposal or, in the case of a nomination or
nominations, a sufficient number of holders of the corporation's voting shares
to elect such nominee or nominees (an affirmative statement of such intent, a
"Solicitation Notice").
(C) Notwithstanding anything in the second sentence of Section 5(b) of
these Bylaws to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the corporation at least one
hundred (100) days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 5 shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the corporation not later than the close of
business on the tenth (10/th/) day following the day on which such public
announcement is first made by the corporation.
(D) Only such persons who are nominated in accordance with the procedures
set forth in this Section 5 shall be eligible to serve as directors and only
such business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
Section 5. Except as otherwise provided by law, the Chairman of the meeting
shall have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made, or proposed, as the case may
be, in accordance with the procedures set forth in these Bylaws and, if any
proposed nomination or business is not in compliance with these Bylaws, to
declare that such defective proposal or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded.
(E) Notwithstanding the foregoing provisions of this Section 5, in order to
include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Nothing in these Bylaws shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the corporation proxy statement pursuant to
Rule 14a-8 under the 1934 Act.
(F) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the 1934 Act.
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SECTION 6. SPECIAL MEETINGS.
(A) Special meetings of the stockholders of the corporation may be called,
for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii)
the Chief Executive Officer, or (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board of Directors for
adoption), and shall be held at such place, on such date, and at such time as
the Board of Directors, shall fix.
(B) If a special meeting is properly called by any person or persons other
than the Board of Directors, the request shall be in writing, specifying the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon determination of
the time and place of the meeting, the officer receiving the request shall cause
notice to be given to the stockholders entitled to vote, in accordance with the
provisions of Section 7 of these Bylaws. If the notice is not given within one
hundred (100) days after the receipt of the request, the person or persons
properly requesting the meeting may set the time and place of the meeting and
give the notice. Nothing contained in this paragraph (b) shall be construed as
limiting, fixing, or affecting the time when a meeting of stockholders called by
action of the Board of Directors may be held.
(C) Nominations of persons for election to the Board of Directors may be
made at a special meeting of stockholders at which directors are to be elected
pursuant to the corporation's notice of meeting (i) by or at the direction of
the Board of Directors or (ii) by any stockholder of the corporation who is a
stockholder of record at the time of giving notice provided for in these Bylaws
who shall be entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 6(c). In the event the corporation calls a
special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be), for election to such position(s) as specified
in the corporation's notice of meeting, if the stockholder's notice required by
Section 5(b) of these Bylaws shall be delivered to the Secretary at the
principal executive offices of the corporation not earlier than the close of
business on the one hundred twentieth (120/th/) day prior to such special
meeting and not later than the close of business on the later of the ninetieth
(90/th/) day prior to such meeting or the tenth (10/th/) day following the day
on which public announcement is first made of the date of the special meeting
and of the nominees proposed by the Board of Directors to be elected at such
meeting. In no event shall the public announcement of an adjournment of a
special meeting commence a new time period for the giving of a stockholder's
notice as described above.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not
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less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting, such notice to specify the
place, date and hour and purpose or purposes of the meeting. Notice of the time,
place and purpose of any meeting of stockholders may be waived in writing,
signed by the person entitled to notice thereof, either before or after such
meeting, and will be waived by any stockholder by his attendance thereat in
person or by proxy, except when the stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Any stockholder so waiving notice of such meeting shall be bound by
the proceedings of any such meeting in all respects as if due notice thereof had
been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise
provided by statute or by the Certificate of Incorporation, or by these Bylaws,
the presence, in person or by proxy duly authorized, of the holders of a
majority of the outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a quorum, any meeting
of stockholders may be adjourned, from time to time, either by the chairman of
the meeting or by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by statute, the Certificate of Incorporation or these Bylaws,
in all matters other than the election of directors, the affirmative vote of the
majority of shares present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders.
Except as otherwise provided by statute, the Certificate of Incorporation or
these Bylaws, directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Where a separate vote by a class or classes
or series is required, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes or series, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to that
vote on that matter and, except where otherwise provided by the statute or by
the Certificate of Incorporation or these Bylaws, the affirmative vote of the
majority (plurality, in the case of the election of directors) of the votes cast
by the holders of shares of such class or classes or series shall be the act of
such class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
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SECTION 10. VOTING RIGHTS. For the purpose of determining those stockholders
entitled to vote at any meeting of the stockholders, except as otherwise
provided by law, only persons in whose names shares stand on the stock records
of the corporation on the record date, as provided in Section 12 of these
Bylaws, shall be entitled to vote at any meeting of stockholders. Every person
entitled to vote shall have the right to do so either in person or by an agent
or agents authorized by a proxy granted in accordance with Delaware law. An
agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the Delaware General Corporation Law, Section 217(b). If
the instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at the place where
the meeting is to be held. The list shall be produced and kept at the time and
place of meeting during the whole time thereof and may be inspected by any
stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
(A) Unless otherwise provided in the Certificate of Incorporation, any
action required by statute to be taken at any annual or special meeting of the
stockholders, or any action which may be taken at any annual or special meeting
of the stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
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(B) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered to the corporation in the manner herein
required, written consents signed by a sufficient number of stockholders to take
action are delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
(C) Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the
Delaware General Corporation Law if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written consent has been given in accordance with
Section 228 of the Delaware General Corporation Law.
(D) Notwithstanding the foregoing, no such action by written consent may be
taken following the closing of the initial public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), covering the offer and sale of Common Stock of the corporation
(the "Initial Public Offering").
SECTION 14. ORGANIZATION.
(A) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote, present in person or by proxy,
shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary
directed to do so by the President, shall act as secretary of the meeting.
(B) The Board of Directors of the corporation shall be entitled to make
such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by
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the Board of Directors or the chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with rules of parliamentary
procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors of
the corporation shall be fixed in accordance with the Certificate of
Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient.
SECTION 16. POWERS. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders of
any series of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the Initial Public Offering, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the second
annual meeting of stockholders following the closing of the Initial Public
Offering, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third annual
meeting of stockholders following the closing of the Initial Public Offering,
the term of office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three years. At each succeeding
annual meeting of stockholders, directors shall be elected for a full term of
three years to succeed the directors of the class whose terms expire at such
annual meeting.
Notwithstanding the foregoing provisions of this section, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
SECTION 18. VACANCIES.
(A) Unless otherwise provided in the Certificate of Incorporation, any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes and any newly created directorships
resulting from any increase in the number of directors shall, unless the Board
of Directors determines by resolution that any such vacancies or newly created
directorships shall be filled by stockholders, be filled only by the affirmative
vote of a majority of the directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in accordance with the
preceding sentence shall hold office for
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the remainder of the full term of the director for which the vacancy was created
or occurred and until such director's successor shall have been elected and
qualified. A vacancy in the Board of Directors shall be deemed to exist under
this Bylaw in the case of the death, removal or resignation of any director.
(B) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
Delaware General Corporation Law.
SECTION 19. RESIGNATION. Any director may resign at any time by delivering
his written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made, it shall
be deemed effective at the pleasure of the Board of Directors. When one or more
directors shall resign from the Board of Directors, effective at a future date,
a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective, and
each Director so chosen shall hold office for the unexpired portion of the term
of the Director whose place shall be vacated and until his successor shall have
been duly elected and qualified.
SECTION 20. REMOVAL.
(A) Neither the Board of Directors nor any individual director may be
removed without cause.
(B) Subject to any limitation imposed by law, any individual director or
directors may be removed with cause by the affirmative vote of a majority of the
voting power of the corporation entitled to vote at an election of directors.
SECTION 21. MEETINGS.
(A) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be
held immediately before or after the annual meeting of stockholders and at the
place where such meeting is held. No notice of an annual meeting of the Board of
Directors shall be necessary and such meeting shall be held for the purpose of
electing officers and transacting such other business as may lawfully come
before it.
(B) REGULAR MEETINGS. Unless otherwise restricted by the Certificate of
Incorporation, regular meetings of the Board of Directors may be held at any
time or date and at any place within or without the State of Delaware which has
been designated by the Board of
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Directors and publicized among all directors. No formal notice shall be required
for regular meetings of the Board of Directors.
(C) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of
Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the President or any two of the directors.
(D) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any
committee thereof, may participate in a meeting by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting by such means
shall constitute presence in person at such meeting.
(E) NOTICE OF MEETINGS. Notice of the time and place of all special
meetings of the Board of Directors shall be orally or in writing, by telephone,
including a voice messaging system or other system or technology designed to
record and communicate messages, facsimile, telegraph or telex, or by electronic
mail or other electronic means, during normal business hours, at least twenty-
four (24) hours before the date and time of the meeting, or sent in writing to
each director by first class mail, charges prepaid, at least three (3) days
before the date of the meeting. Notice of any meeting may be waived in writing
at any time before or after the meeting and will be waived by any director by
attendance thereat, except when the director attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
(F) WAIVER OF NOTICE. The transaction of all business at any meeting of
the Board of Directors, or any committee thereof, however called or noticed, or
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the directors not present shall sign a written waiver of
notice. All such waivers shall be filed with the corporate records or made a
part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(A) Unless the Certificate of Incorporation requires a greater number and
except with respect to indemnification questions arising under Section 43
hereof, for which a quorum shall be one-third of the exact number of directors
fixed from time to time in accordance with the Certificate of Incorporation, a
quorum of the Board of Directors shall consist of a majority of the exact number
of directors fixed from time to time by the Board of Directors in accordance
with the Certificate of Incorporation; provided, however, at any meeting whether
a quorum be present or otherwise, a majority of the directors present may
adjourn from time to time until the time fixed for the next regular meeting of
the Board of Directors, without notice other than by announcement at the
meeting.
(B) At each meeting of the Board of Directors at which a quorum is present,
all questions and business shall be determined by the affirmative vote of a
majority of the
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directors present, unless a different vote be required by law, the Certificate
of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(A) EXECUTIVE COMMITTEE. The Board of Directors may appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and provided in the
resolution of the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to (i) approving or adopting, or recommending to
the stockholders, any action or matter expressly required by the Delaware
General Corporation Law to be submitted to stockholders for approval, or (ii)
adopting, amending or repealing any bylaw of the corporation.
(B) OTHER COMMITTEES. The Board of Directors may, from time to time,
appoint such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall any such committee have the powers denied to the Executive
Committee in these Bylaws.
(C) TERM. Each member of a committee of the Board of Directors shall serve
a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to any requirements of any
outstanding series of preferred Stock and the provisions of subsections (a) or
(b) of this Bylaw, may at any time increase or decrease the number of members of
a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any
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committee vacancy created by death, resignation, removal or increase in the
number of members of the committee. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
(D) MEETINGS. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any director who is a member of such
committee, upon written notice to the members of such committee of the time and
place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman of
the Board of Directors, or, if a Chairman has not been appointed or is absent,
the President (if a director), or if the President is absent, the most senior
Vice President (if a director), or, in the absence of any such person, a
chairman of the meeting chosen by a majority of the directors present, shall
preside over the meeting. The Secretary, or in his absence, any Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may
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assign such additional titles to one or more of the officers as it shall deem
appropriate. Any one person may hold any number of offices of the corporation at
any one time unless specifically prohibited therefrom by law. The salaries and
other compensation of the officers of the corporation shall be fixed by or in
the manner designated by the Board of Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(A) GENERAL. All officers shall hold office at the pleasure of the Board
of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors.
(B) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers, as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(C) DUTIES OF PRESIDENT. The President shall preside at all meetings of
the stockholders and at all meetings of the Board of Directors, unless the
Chairman of the Board of Directors has been appointed and is present. Unless
some other officer has been elected Chief Executive Officer of the corporation,
the President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the corporation. The
President shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers, as the Board of
Directors shall designate from time to time.
(D) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform
the duties of the President in the absence or disability of the President or
whenever the office of President is vacant. The Vice Presidents shall perform
other duties commonly incident to their office and shall also perform such other
duties and have such other powers as the Board of Directors or the President
shall designate from time to time.
(E) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the
stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers, as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform
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other duties commonly incident to his office and shall also perform such other
duties and have such other powers as the Board of Directors or the President
shall designate from time to time.
(F) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep or cause to be kept the books of account of the corporation in a thorough
and proper manner and shall render statements of the financial affairs of the
corporation in such form and as often as required by the Board of Directors or
the President. The Chief Financial Officer, subject to the order of the Board of
Directors, shall have the custody of all funds and securities of the
corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. The President may direct the Treasurer or any Assistant Treasurer,
or the Controller or any Assistant Controller to assume and perform the duties
of the Chief Financial Officer in the absence or disability of the Chief
Financial Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties commonly incident
to his office and shall also perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time to
time delegate the powers or duties of any officer to any other officer or agent,
notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer. (Del. Code Ann., tit. 8, (S) 142(b))
SECTION 31. REMOVAL. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE
CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may,
in its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into
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contracts on behalf of the corporation, except where otherwise provided by law
or these Bylaws, and such execution or signature shall be binding upon the
corporation.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares
of stock of the corporation shall be in such form as is consistent with the
Certificate of Incorporation and applicable law. Every holder of stock in the
corporation shall be entitled to have a certificate signed by or in the name of
the corporation by the Chairman of the Board of Directors, or the President or
any Vice President and by the Treasurer or Assistant Treasurer or the Secretary
or Assistant Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be facsimiles.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue. Each certificate shall state upon the face or
back thereof, in full or in summary, all of the powers, designations,
preferences, and rights, and the limitations or restrictions of the shares
authorized to be issued or shall, except as otherwise required by law, set forth
on the face or back a statement that the corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights. Within a reasonable time after the issuance or
transfer of uncertificated stock, the corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates pursuant to this section or otherwise required
by law or with respect to this section a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative participating, optional or other special
rights of each class
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of stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights. Except as otherwise expressly provided by
law, the rights and obligations of the holders of certificates representing
stock of the same class and series shall be identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to agree to indemnify the corporation in such manner as it shall
require or to give the corporation a surety bond in such form and amount as it
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 36. TRANSFERS.
(A) Transfers of record of shares of stock of the corporation shall be made
only upon its books by the holders thereof, in person or by attorney duly
authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(B) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the Delaware General Corporation Law.
SECTION 37. FIXING RECORD DATES.
(A) In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, the Board of Directors may fix, in advance, a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall, subject to
applicable law, not be more than sixty (60) nor less than ten (10) days before
the date of such meeting. If no record date is fixed by the Board of Directors,
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or if notice is waived, at the close
of business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
(B) Prior to the Initial Public Offering, in order that the corporation may
determine the stockholders entitled to consent to corporate action in writing
without a meeting, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which date shall not be more than ten
(10) days after the date upon which the resolution fixing the record date is
adopted by the Board of Directors. Any stockholder of record seeking to have the
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stockholders authorize or take corporate action by written consent shall, by
written notice to the Secretary, request the Board of Directors to fix a record
date. The Board of Directors shall promptly, but in all events within ten (10)
days after the date on which such a request is received, adopt a resolution
fixing the record date. If no record date has been fixed by the Board of
Directors within ten (10) days of the date on which such a request is received,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in the State
of Delaware, its principal place of business or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(C) In order that the corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted, and which record date shall be not more than sixty (60) days prior
to such action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other
corporate securities of the corporation, other than stock certificates (covered
in Section 34), may be signed by the Chairman of the Board of Directors, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature, or
where permissible facsimile signature, of a
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trustee under an indenture pursuant to which such bond, debenture or other
corporate security shall be issued, the signatures of the persons signing and
attesting the corporate seal on such bond, debenture or other corporate security
may be the imprinted facsimile of the signatures of such persons. Interest
coupons appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of Incorporation
and applicable law, if any, may be declared by the Board of Directors pursuant
to law at any regular or special meeting. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation and applicable law.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
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ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS,
EMPLOYEES AND OTHER AGENTS.
(A) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its
directors and executive officers (for the purposes of this Article XI,
"executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law or any other applicable law; provided, however, that the
corporation may modify the extent of such indemnification by individual
contracts with its directors and executive officers; and, provided, further,
that the corporation shall not be required to indemnify any director or
executive officer in connection with any proceeding (or part thereof) initiated
by such person unless (i) such indemnification is expressly required to be made
by law, (ii) the proceeding was authorized by the Board of Directors of the
corporation, (iii) such indemnification is provided by the corporation, in its
sole discretion, pursuant to the powers vested in the corporation under the
Delaware General Corporation Law or any other applicable law or (iv) such
indemnification is required to be made under subsection (d).
(B) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have
power to indemnify its other officers, employees and other agents as set forth
in the Delaware General Corporation Law or any other applicable law. The Board
of Directors shall have the power to delegate the determination of whether
indemnification shall be given to any such person.
(C) EXPENSES. The corporation shall advance to any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
officer of the corporation (except by reason of the fact that such officer is or
was a director or executive officer of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion,
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that the facts known to the decision-making party at the time such determination
is made demonstrate clearly and convincingly that such person acted in bad faith
or in a manner that such person did not believe to be in or not opposed to the
best interests of the corporation.
(D) ENFORCEMENT. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law or any other applicable law for the corporation
to indemnify the claimant for the amount claimed. In connection with any claim
by an officer of the corporation (except in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such officer is or was a director or executive officer of the corporation)
for advances, the corporation shall be entitled to raise a defense as to any
such action clear and convincing evidence that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation, or with respect to any criminal action or
proceeding that such person acted without reasonable cause to believe that his
conduct was lawful. Neither the failure of the corporation (including its Board
of Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law or any
other applicable law, nor an actual determination by the corporation (including
its Board of Directors, independent legal counsel or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that claimant has not met the applicable
standard of conduct. In any suit brought by a director or executive officer to
enforce a right to indemnification or to an advancement of expenses hereunder,
the burden of proving that the director or executive officer is not entitled to
be indemnified, or to such advancement of expenses, under this Article XI or
otherwise shall be on the corporation.
(E) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this
Bylaw shall not be exclusive of any other right which such person may have or
hereafter acquire under any applicable statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law, or by any
other applicable law.
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(F) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw
shall continue as to a person who has ceased to be a director, officer, employee
or other agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(G) INSURANCE. To the fullest extent permitted by the Delaware General
Corporation Law or any other applicable law, the corporation, upon approval by
the Board of Directors, may purchase insurance on behalf of any person required
or permitted to be indemnified pursuant to this Bylaw.
(H) AMENDMENTS. Any repeal or modification of this Bylaw shall only be
prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(I) SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify each director and executive officer to the full extent
not prohibited by any applicable portion of this Bylaw that shall not have been
invalidated, or by any other applicable law. If this Section 43 shall be invalid
due to the application of the indemnification provisions of another
jurisdiction, then the corporation shall indemnify each director and executive
officer to the full to the full extent under any other applicable law.
(J) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following
definitions shall apply:
(1) The term "proceeding" shall be broadly construed and shall include,
without limitation, the investigation, preparation, prosecution, defense,
settlement, arbitration and appeal of, and the giving of testimony in, any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed and shall include,
without limitation, court costs, attorneys' fees, witness fees, fines, amounts
paid in settlement or judgment and any other costs and expenses of any nature or
kind incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Bylaw with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
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(4) References to a "director," "executive officer," "officer,"
"employee," or "agent" of the corporation shall include, without limitation,
situations where such person is serving at the request of the corporation as,
respectively, a director, executive officer, officer, employee, trustee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
(5) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan; and references to "serving at the
request of the corporation" shall include any service as a director, officer,
employee or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee, or agent with respect to an
employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(A) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock record
of the corporation or its transfer agent.
(B) NOTICE TO DIRECTORS. Any notice required to be given to any director
may be given by the method stated in subsection (a), or by overnight delivery
service, facsimile, telex or telegram, except that such notice other than one
which is delivered personally shall be sent to such address as such director
shall have filed in writing with the Secretary, or, in the absence of such
filing, to the last known post office address of such director.
(C) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly
authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(D) TIME NOTICES DEEMED GIVEN. All notices given by mail or by overnight
delivery service, as above provided, shall be deemed to have been given as at
the time of mailing, and all notices given by facsimile, telex or telegram shall
be deemed to have been given as of the sending time recorded at time of
transmission.
22.
<PAGE>
(E) METHODS OF NOTICE. It shall not be necessary that the same method of
giving notice be employed in respect of all directors, but one permissible
method may be employed in respect of any one or more, and any other permissible
method or methods may be employed in respect of any other or others.
(F) FAILURE TO RECEIVE NOTICE. The period or limitation of time within
which any stockholder may exercise any option or right, or enjoy any privilege
or benefit, or be required to act, or within which any director may exercise any
power or right, or enjoy any privilege, pursuant to any notice sent him in the
manner above provided, shall not be affected or extended in any manner by the
failure of such stockholder or such director to receive such notice.
(G) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice
is required to be given, under any provision of law or of the Certificate of
Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action or
meeting which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the corporation is
such as to require the filing of a certificate under any provision of the
Delaware General Corporation Law, the certificate shall state, if such is the
fact and if notice is required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is unlawful.
(H) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least
23.
<PAGE>
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the voting stock of the corporation entitled to vote.
The Board of Directors shall also have the power to adopt, amend, or repeal
Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 45. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing in these Bylaws shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
24.
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Exhibit 4.2
CORTELCO SYSTEMS, INC.
----------------
INVESTOR RIGHTS AGREEMENT
-----------------
Dated as of July 31, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Article 1 General......................................... 1
1.1 Definitions..................................... 1
Article 2 Registration; Restrictions On Transfer.......... 3
2.1 Restrictions on Transfer........................ 3
2.2 Demand Registration............................. 4
2.3 Piggyback Registrations......................... 5
2.4 Form S-3 Registration........................... 6
2.5 Expenses of Registration........................ 7
2.6 Obligations of the Company...................... 8
2.7 Termination of Registration Rights.............. 9
2.8 Delay of Registration; Furnishing Information... 9
2.9 Indemnification................................. 10
2.10 Assignment of Registration Rights............... 12
2.11 Amendment of Registration Rights................ 12
2.12 Limitation on Subsequent Registration Rights.... 12
2.13 "Market Stand-Off" Agreement.................... 13
2.14 Rule 144 Reporting.............................. 13
Article 3 Covenants Of The Company........................ 13
3.1 Basic Financial Information and Reporting....... 13
3.2 Inspection Rights............................... 14
3.3 Confidentiality of Records...................... 14
3.4 Reservation of Common Stock..................... 15
3.5 Stock Vesting................................... 15
3.6 Board of Directors Approval..................... 16
3.7 Termination of Covenants........................ 16
Article 4 Rights Of First Refusal......................... 16
4.1 Subsequent Offerings............................ 17
4.2 Exercise of Rights.............................. 17
4.3 Issuance of Equity Securities to Other Persons.. 17
4.4 Termination of Rights of First Refusal.......... 17
4.5 Transfer of Rights of First Refusal............. 17
4.6 Excluded Securities............................. 18
Article 5 Miscellaneous................................... 18
5.1 Governing Law................................... 18
5.2 Survival........................................ 18
5.3 Successors and Assigns.......................... 19
5.4 Severability.................................... 19
5.5 Amendment and Waiver............................ 19
</TABLE>
<PAGE>
<TABLE>
<S> <C>
5.6 Delays or Omissions............................. 19
5.7 Notices......................................... 19
5.8 Attorneys' Fees................................. 20
5.9 Titles and Subtitles............................ 20
5.10 Counterparts.................................... 20
5.11 Special Provision Regarding Alcatel............. 20
</TABLE>
Exhibit A - Form of Financial Statement
<PAGE>
INVESTOR RIGHTS AGREEMENT
This Investor Rights Agreement ("Agreement") is entered into as of July 31,
1997 by and among CORTELCO SYSTEMS, INC., a Delaware corporation (the
"Company"); CORTELCO SYSTEMS HOLDING CORP. (the "Founder"); CHINAVEST IV, L.P.,
a Delaware Limited Partnership ("ChinaVest IV"); CHINAVEST IV-A, L.P., a
Delaware Limited Partnership ("ChinaVest IV-A"); and CHINAVEST IV-B, L.P., a
Bermuda Limited Partnership ("ChinaVest IV-B). ChinaVest IV, ChinaVest IV-A and
ChinaVest IV-B are collectively referred to herein as "ChinaVest."
RECITALS
WHEREAS, the Company and ChinaVest are entering into the Convertible Note
Purchase Agreement dated as of the date hereof between the Company and ChinaVest
(the "Purchase Agreement"), pursuant to which the Company shall sell and issue a
Convertible Subordinated Note dated as of the date hereof, made by the Company
in favor of ChinaVest (the "Note"); and
WHEREAS, the Note will be convertible into shares of the Company's Series A
Preferred Stock (the "Shares"); and
WHEREAS, as a condition to entering into the Purchase Agreement, ChinaVest
and the Company shall agree to certain registration rights, information rights
and other rights as set forth below.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement and in the
Purchase Agreement, the parties mutually agree as follows:
ARTICLE 1
GENERAL
1.1 DEFINITIONS. As used in this Agreement the following terms shall have
the following respective meanings:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"HOLDER" means any person owning of record Registrable Securities that have
not been sold to the public or any assignee of record of such Registrable
Securities in accordance with Section 2.10 hereof.
"INITIAL OFFERING" means the Company's first firm commitment underwritten
public offering of its Common Stock registered under the Securities Act.
1
<PAGE>
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.
"REGISTRABLE SECURITIES" means (i) Common Stock of the Company issued or
issuable upon conversion of the Shares issued or issuable upon conversion of the
Note; (ii) Common Stock of the Company held by the Founder as of the date
hereof; and (iii) any Common Stock of the Company issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, such above-described securities. Notwithstanding the
foregoing, Registrable Securities shall not include any securities sold by a
person to the public either pursuant to a registration statement or Rule 144 or
sold in a private transaction in which the transferror's rights under Article 2
of this Agreement are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" means the number of shares
determined by calculating the total number of shares of the Company's Common
Stock that are Registrable Securities and either (1) are then issued and
outstanding or (2) are issuable pursuant to then exercisable or convertible
securities.
"REGISTRATION EXPENSES" means all expenses incurred by the Company in
complying with Sections 2.2, 2.3 and 2.4 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements not to exceed ten
thousand dollars ($10,000) of a single special counsel for the Holders, blue sky
fees and expenses and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular employees of
the Company which shall be paid in any event by the Company).
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SELLING EXPENSES" means all underwriting discounts and selling commissions
applicable to the sale.
"SHARES" means the Company's Series A Preferred Stock issued pursuant to
the Purchase Agreement.
"FORM S-3" means such form under the Securities Act as in effect on the
date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"SEC" or "COMMISSION" means the Securities and Exchange Commission.
ARTICLE 2
REGISTRATION; RESTRICTIONS ON TRANSFER
2.1 RESTRICTIONS ON TRANSFER.
2
<PAGE>
(a) Each Holder agrees not to make any disposition of all or any
portion of the Shares or Registrable Securities unless and until:
(i) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(ii) (A) The transferee has agreed in writing to be bound by this
Section 2.1, (B) Such Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (C) if reasonably
requested by the Company, such Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such shares under the Securities
Act. It is agreed that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144 except in unusual circumstances.
(iii) Notwithstanding the provisions of paragraphs (i) and (ii)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by a Holder which is (A) a partnership to its partners or former
partners in accordance with partnership interests, (B) a corporation to its
stockholders in accordance with their interest in the corporation, (C) a limited
liability company to its members or former members in accordance with their
interest in the limited liability company, or (D) to the Holder's family member
or trust for the benefit of an individual Holder, provided the transferee will
be subject to the terms of this Section 2.1 to the same extent as if he were an
original Holder hereunder.
(b) Each certificate representing Shares or Registrable Securities
shall (unless otherwise permitted by the provisions of the Agreement) be stamped
or otherwise imprinted with a legend substantially similar to the following (in
addition to any legend required under applicable state securities laws or as
provided elsewhere in this Agreement):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT
SUCH REGISTRATION IS NOT REQUIRED.
(c) The Company shall be obligated to reissue promptly unlegended
certificates at the request of any holder thereof if the holder shall have
obtained an opinion of counsel (which counsel may be counsel to the Company)
reasonably acceptable to the Company to the effect that the securities proposed
to be disposed of may lawfully be so disposed of without registration,
qualification or legend.
3
<PAGE>
(d) Any legend endorsed on an instrument pursuant to applicable
state securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
2.2 DEMAND REGISTRATION.
2.2.1 Subject to the conditions of this Section 2.2, if the Company
shall receive a written request from the Holders of more than thirty-five
percent (35%) of the Registrable Securities then outstanding (the "Initiating
Holders") that the Company file a registration statement under the Securities
Act covering the registration of Registrable Securities having an aggregate
offering price to the public in excess of $5,000,000 (a "Qualified Public
Offering"), then the Company shall, within thirty (30) days of the receipt
thereof, give written notice of such request to all Holders, and subject to the
limitations of this Section 2.2, effect, as soon as practicable, the
registration under the Securities Act of all Registrable Securities that the
Holders request to be registered.
2.2.2 If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 2.2
and the Company shall include such information in the written notice referred to
in Section 2.2.1. In such event, the right of any Holder to include its
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders (which underwriter or
underwriters shall be reasonably acceptable to the Company). Notwithstanding any
other provision of this Section 2.2, if the underwriter advises the Company that
marketing factors require a limitation of the number of securities to be
underwritten (including Registrable Securities) then the Company shall so advise
all Holders of Registrable Securities which would otherwise be underwritten
pursuant hereto, and the number of shares that may be included in the
underwriting shall be allocated, first, to the Holders other than the Founder
and its assigns on a pro rata basis based on the total number of Registrable
Securities held by such Holders and, second, to the Founder and its assigns on a
pro rata basis based on the total number of Registrable Securities held by such
Holders (including in each case the Initiating Holders). Any Registrable
Securities excluded or withdrawn from such underwriting shall be withdrawn from
the registration.
2.2.3 The Company shall not be required to effect a registration
pursuant to this Section 2.2:
(i) prior to the earlier of the Company's Initial Offering or
June 1, 2000; or
(ii) after the Company has effected two (2) registrations
pursuant to this Section 2.2, and such registrations have been declared or
ordered effective; or
4
<PAGE>
(iii) during the period starting with the date of filing of, and
ending on the date one hundred eighty (180) days following the effective date of
the registration statement pertaining to the Initial Offering; or
(iv) if the Company shall furnish to Holders requesting a
registration statement pursuant to this Section 2.2, a certificate signed by the
Chairman of the Board stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its stockholders for such registration statement to be effected at such time, in
which event the Company shall have the right to defer such filing for a period
of not more than ninety (90) days after receipt of the request of the Initiating
Holders; provided that such right to delay a request shall be exercised by the
Company no more than twice in any one-year period.
2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities in writing at least twenty (20) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and will afford each such Holder an opportunity
to include in such registration statement all or part of such Registrable
Securities held by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within five (5) days after the above-described notice from the Company,
so notify the Company in writing. Such notice shall state the intended method
of disposition of the Registrable Securities by such Holder. If a Holder
decides not to include all of its Registrable Securities in any registration
statement thereafter filed by the Company, such Holder shall nevertheless
continue to have the right to include any Registrable Securities in any
subsequent such registration statement or registration statements as may be
filed by the Company with respect to offerings of its securities, all upon the
terms and conditions set forth herein.
2.3.1 UNDERWRITING. If the registration statement under which the
Company gives notice under this Section 2.3 is for an underwritten offering, the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder to be included in a registration pursuant to this
Section 2.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of the Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated, first, to the Company; second, to the Holders other than the
Founder and its assigns on a pro rata basis based on the total number of
Registrable Securities held by such Holders; third, to the Founder and its
assigns on a pro rata basis based on the total number of Registrable Securities
held by such Holders; and fourth, to any stockholder of the Company (other than
a Holder) on a pro rata basis. No such reduction shall reduce the securities
being offered by the Company for
5
<PAGE>
its own account to be included in the registration and underwriting, and in no
event shall the amount of securities of the selling Holders included in the
registration be reduced below twenty-five percent (25%) of the total amount of
securities included in such registration, unless such offering is the Initial
Offering and such registration does not include shares of any other selling
stockholders, in which event any or all of the Registrable Securities of the
Holders may be excluded in accordance with the immediately preceding sentence.
In no event will shares of any other selling stockholder be included in such
registration which would reduce the number of shares which may be included by
Holders without the written consent of Holders of not less than sixty-six and
two-thirds percent (66 2/3%) of the Registrable Securities proposed to be sold
in the offering.
2.3.2 RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated or withdraw any
registration initiated by it under this Section 2.3 prior to the effectiveness
of such registration whether or not any Holder has elected to include securities
in such registration. The Registration Expenses of such withdrawn registration
shall be borne by the Company in accordance with Section 2.5 hereof.
2.4 FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders of Registrable Securities a written request or requests that
the Company effect a registration on Form S-3 (or any successor to Form S-3) or
any similar short-form registration statement and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, the Company will:
2.4.1 promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders of Registrable
Securities; and
2.4.2 as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within ten
(10) days after receipt of such written notice from the Company; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 2.4:
(i) if Form S-3 (or any successor or similar form) is not
available for such offering by the Holders, or
(ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an aggregate
price to the public of less than $500,000, or
(iii) if the Company shall furnish to the Holders a certificate
signed by the Chairman of the Board of Directors of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its stockholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
6
<PAGE>
period of not more than one hundred twenty (120) days after receipt of the
request of the Holder or Holders under this Section 2.4; provided, that such
right to delay a request shall be exercised by the Company nor more than twice
in any one-year period, or
(iv) if the Company has, within the eighteen (18) month period
preceding the date of such request, already effected two (2) registrations on
Form S-3 for the Holders pursuant to this Section 2.4, or
(v) in any particular jurisdiction in which the Company would
be required to qualify to do business or to execute a general consent to service
of process in effecting such registration, qualification or compliance.
2.4.3 Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All such Registration Expenses incurred in
connection with registrations requested pursuant to this Section 2.4 after the
first two (2) registrations shall be paid by the selling Holders pro rata in
proportion to the number of shares sold by each. The rights granted in this
Section 2.4 are in addition to the rights granted under Section 2.2.
2.5 EXPENSES OF REGISTRATION. Except as specifically provided herein, all
Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.2 or any registration under
Section 2.3 or Section 2.4 herein shall be borne by the Company. All Selling
Expenses incurred in connection with any registrations hereunder, shall be borne
by the holders of the securities so registered pro rata on the basis of the
number of shares so registered. The Company shall not, however, be required to
pay for expenses of any registration proceeding begun pursuant to Section 2.2 or
2.4, the request of which has been subsequently withdrawn by the Initiating
Holders unless (a) the withdrawal is based upon material adverse information
concerning the Company of which the Initiating Holders were not aware at the
time of such request or (b) the Holders of a majority of Registrable Securities
(which majority must include ChinaVest for so long as ChinaVest holds or is
deemed to hold at least 2,000,000 shares of Registrable Securities, as presently
constituted) agree to forfeit their right to one requested registration pursuant
to Section 2.2 or Section 2.4, as applicable, in which event such right shall be
forfeited by all Holders. If the Holders are required to pay the Registration
Expenses, such expenses shall be borne by the holders of securities (including
Registrable Securities) requesting such registration in proportion to the number
of shares for which registration was requested. If the Company is required to
pay the Registration Expenses of a withdrawn offering pursuant to clause (a)
above, then the Holders shall not forfeit their rights pursuant to Section 2.2
or Section 2.4 to a demand registration.
2.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
2.6.1 Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities
7
<PAGE>
registered thereunder, keep such registration statement effective for up to
ninety (90) days or, if earlier, until the Holder or Holders have completed the
distribution related thereto.
2.6.2 Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
2.6.3 Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
2.6.4 Use all reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
2.6.5 In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
2.6.6 Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
2.6.7 Furnish, at the reasonable request of Holders participating in
the registration, on the date that such Registrable Securities are delivered to
the underwriters for sale, if such securities are being sold through
underwriters, or, if such securities are not being sold through underwriters, on
the date that the registration statement with respect to such securities becomes
effective, (i) an opinion, dated as of such date, of the counsel representing
the Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering and
reasonably satisfactory to the Holders requesting registration, addressed to the
underwriters, if any, and to the Holders requesting registration of Registrable
Securities and (ii) a letter dated as of such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering and reasonably satisfactory to the Holders
requesting registration, addressed to the underwriters, if any, and if permitted
by applicable accounting standards, to the Holders requesting registration of
Registrable Securities.
8
<PAGE>
2.6.8 Notify each Holder of Registrable Securities covered by such
registration statement and such Holder's underwriters, if any, and confirm such
advice in writing: (i) when the registration statement has become effective,
(ii) when any post-effective amendment to the registration statement becomes
effective and (iii) of any request by the SEC for any amendment or supplement to
the registration statement or prospectus or for additional information after the
registration statement has become effective.
2.6.9 Notify each Holder of Registrable Securities covered by such
registration statement if at any time the SEC should institute or threaten to
institute any proceedings for the purpose of issuing, or should issue, a stop
order suspending the effectiveness of such registration statement. Upon the
occurrence of any of the events mentioned in the preceding sentence, the Company
will use all reasonable efforts to prevent the issuance of any such stop order
or to obtain the withdrawal thereof as soon as possible. The Company will
advise each holder of Registrable Securities promptly of any order or
communication of any public board or body addressed to the Company suspending or
threatening to suspend the qualification of any Registrable Securities for sale
in any jurisdiction.
2.6.10 As soon as practicable after the effective date of the
registration statement, and in any event within sixteen (16) months thereafter,
have "made generally available to its security holders" (within the meaning of
Rule 158 under the Securities Act) an earnings statement (which need not be
audited) covering a period of at least twelve (12) months beginning after the
effective date of the registration statement and otherwise complying with
Section 11(a) of the Securities Act.
2.7 TERMINATION OF REGISTRATION RIGHTS . All registration rights
granted under this Article 2 shall terminate and be of no further force and
effect seven (7) years after the date of the Company's Initial Offering. In
addition, a Holder's registration rights shall expire if (i) the Company has
completed its Initial Offering and is subject to the provisions of the Exchange
Act, (ii) such Holder (together with its affiliates, partners and former
partners) holds less than one percent (1%) of the Company's outstanding Common
Stock (treating all share of convertible Preferred Stock on an as converted
basis) and (iii) all Registrable Securities held by and issuance to such Holder
may be sold under Rule 144 during any ninety (90) day period.
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2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION.
2.8.1 No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Article 2.
2.8.2 It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling
Holders shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them and the intended method of disposition of
such securities as shall be required to effect the registration of their
Registrable Securities.
2.9 INDEMNIFICATION. In the event any Registrable Securities are included
in a registration statement under Sections 2.2, 2.3 or 2.4:
2.9.1 To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers, directors and legal counsel
of each Holder, any underwriter (as defined in the Securities Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation") by the Company: (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law in
connection with the offering covered by such registration statement; and the
Company will reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided however, that the indemnity
agreement contained in this Section 2.9.1 shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, underwriter
or controlling person of such Holder.
2.9.2 To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration qualifications or compliance is being effected, indemnify and hold
harmless the Company, each of its directors, its officers, and legal counsel and
each person, if any, who controls the Company within the
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meaning of the Securities Act, any underwriter and any other Holder selling
securities under such registration statement or any of such other Holder's
partners, directors or officers or any person who controls such Holder, against
any losses, claims, damages or liabilities (joint or several) to which the
Company or any such director, officer, controlling person, underwriter or other
such Holder, or partner, director, officer or controlling person of such other
Holder may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder under an instrument duly executed by such Holder and stated to be
specifically for use in connection with such registration; and each such Holder
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, controlling person, underwriter or other Holder, or
partner, officer, director or controlling person of such other Holder in
connection with investigating or defending any such loss, claim, damage,
liability or action if it is judicially determined that there was such a
Violation; provided, however, that the indemnity agreement contained in this
Section 2.9.2 shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld;
provided further, that in no event shall any indemnity under this Section 2.9
exceed the proceeds from the offering received by such Holder.
2.9.3 Promptly after receipt by an indemnified party under this
Section 2.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 2.9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 2.9.
2.9.4 If the indemnification provided for in this Section 2.9 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to herein,
the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s)
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that resulted in such loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by a court of law by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission; provided, that in no event shall any
contribution by a Holder hereunder exceed the proceeds from the offering
received by such Holder.
2.9.5 The obligations of the Company and Holders under this Section
2.9 shall survive completion of any offering of Registrable Securities in a
registration statement. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. In the event any offering of Registrable Securities is underwritten,
and the underwriting agreement provides for indemnification and/or contribution
by the Company and the Holders offering securities thereunder, the
indemnification and/or contribution obligations of the Company and the Holders
hereunder shall in no event exceed the obligations of the parties set forth in
such underwriting agreement.
2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to
register Registrable Securities pursuant to this Article 2 may be assigned by a
Holder to a transferee or assignee of Registrable Securities which (i) is a
subsidiary, parent, general partner, limited partner, retired partner or
stockholder of a Holder or (ii) is a Holder's family member or trust for the
benefit of a Holder; provided, however, (A) the transferor shall, within ten
(10) days after such transfer, furnish to the Company written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned and (B) such transferee shall
agree to be subject to all restrictions set forth in this Agreement.
2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Article 2 may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of at least a majority of the
Registrable Securities (which majority must include ChinaVest for so long as
ChinaVest holds or is deemed to hold 2,000,000 shares of Registrable Securities,
as presently constituted). Any amendment or waiver effected in accordance with
this Section 2.11 shall be binding upon each Holder and the Company. By
acceptance of any benefits under this Article 2, Holders of Registrable
Securities hereby agree to be bound by the provisions hereunder.
2.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this
Agreement, the Company shall not, without the prior written consent of the
Holders of a majority of the Registrable Securities (which majority must include
ChinaVest for so long as ChinaVest holds or is deemed to hold at least 2,000,000
shares or Registrable Securities, as presently constituted), enter into any
agreement with any holder or prospective holder of any securities of
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the Company that would grant such holder registration rights senior to those
granted to the Holders hereunder.
2.13 "MARKET STAND-OFF" AGREEMENT. If requested by the Company as the
representative of the underwriters of Common Stock (or other securities) of the
Company, each Holder shall not sell or otherwise transfer or dispose of any
Shares Common Stock (or other securities) of the Company held by such each
Holder (other than those included in the registration) for a period specified by
the representative of the underwriters not to exceed one hundred eighty (180)
days following the effective date of a registration statement of the Company
filed under the Securities Act; provided that all officers and directors of the
Company enter into similar agreements. The obligations described in this
Section 2.13 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated
in the future, or a registration relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms that may be promulgated in the future.
The Company may impose stop-transfer instructions with respect to the shares of
Common Stock (or other securities) subject to the foregoing restriction until
the end of said one hundred eighty (180) day period.
2.14 RULE 144 REPORTING. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act;
(c) So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request: a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 of the Securities
Act, and of the Exchange Act (at any time after it has become subject to such
reporting requirements); a copy of the most recent annual or quarterly report of
the Company; and such other reports and documents as a Holder may reasonably
request in availing itself of any rule or regulation of the SEC allowing it to
sell any such securities without registration.
ARTICLE 3
COVENANTS OF THE COMPANY
3.1 BASIC FINANCIAL INFORMATION AND REPORTING.
3.1.1 The Company will maintain true books and records of account in
which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting
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principles consistently applied, and will set aside on its books all such proper
accruals and reserves as shall be required under generally accepted accounting
principles consistently applied.
3.1.2 As soon as practicable after the end of each fiscal year of the
Company, and in any event within one hundred twenty (120) days thereafter, the
Company will furnish ChinaVest a consolidated balance sheet of the Company, as
at the end of such fiscal year, and a consolidated statement of income and a
consolidated statement of cash flows of the Company, in substantially the form
attached as Exhibit A hereto, for such year, all prepared in accordance with
generally accepted accounting principles consistently applied and setting forth
in each case in comparative form the figures for the previous fiscal year, all
in reasonable detail. Such financial statements shall be accompanied by a report
and opinion thereon by independent public accountants of national standing
selected by the Company's Board of Directors.
3.1.3 As soon as practicable after the end of each quarter, and in
any event within thirty (30) days thereafter, the Company will furnish to
ChinaVest the unaudited consolidated and consolidating balance sheet of the
Company) and any of its subsidiaries as at the end of such quarter) and the
related unaudited consolidated and consolidating statements of operations,
stockholders' equity and cash flows of the Company (and any such subsidiaries)
for such quarter and for the elapse period of such fiscal year, all in
reasonable detail and stating in comparative form the figures as of the end of
and for the comparable periods of the preceding fiscal year and budgeted figures
for the period. All such financial statements shall be complete and correct in
all material respects and shall be prepared in conformity with accounting
principles generally accepted in the United States and applied on a consistent
basis throughout the periods reflected therein except as stated therein and
shall be accompanied by a certificate of the chief financial officer of the
Company to such effect. Each such financial statement shall be accompanied by a
brief narrative description prepared by management of the operations of the
Company during such period covered thereby, including, without limitation,
identification of relevant trends in the Company's business.
3.1.4 As soon as available, but in any event not later than the end
of each fiscal year the Company, the Company will furnish to ChinaVest the
financial plan of the Company (and any subsidiaries) for the next succeeding
fiscal year, including but not limited to a cash flow projection, operating
budged, calculated monthly, and a business plan for the next three succeeding
fiscal years, and any updates or revisions to any of the foregoing as soon as
available.
3.2 INSPECTION RIGHTS. For so long as ChinaVest shall own not less than
seven million (7,000,000) shares of Registrable Securities (as adjusted for
stock splits and combinations), ChinaVest shall have the right to visit and
inspect any of the properties of the Company or any of its subsidiaries, to
discuss the affairs, finances and accounts of the Company or any of its
subsidiaries with its officers, and to review such additional information
regarding the Company as it may reasonably request, including without limitation
any information or reports required by reason of reporting or regulatory
requirements to which ChinaVest is subject, all at such times and as often as
may be reasonably requested.
3.3 CONFIDENTIALITY OF RECORDS.
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3.3.1 ChinaVest agrees not to use Confidential Information (as
hereinafter defined) of the Company for its own use or for any purpose except to
evaluate and enforce its equity investment in the Company. ChinaVest shall
undertake to treat such Confidential Information in a manner consistent with the
treatment of its own information of such proprietary nature and agrees that it
shall protect the confidentiality of and use its best efforts to prevent
disclosure of the Confidential Information to prevent it from falling into the
public domain or the possession of unauthorized persons. Each transferee of any
ChinaVest who receives Confidential Information shall agree to be bound by such
provisions. For purposes of this Section, "Confidential Information": means any
information, technical data, or know-how, including, but not limited to, the
Company's research, products, software, services, development, inventions,
processes, designs, drawings, engineering, marketing, or finances, disclosed by
the Company either directly or indirectly in writing, orally or by drawings or
inspection of parts or equipment which written material is stamped
"Confidential" or "Proprietary" or if disclosed orally, is promptly confirmed in
writing to be Confidential Information.
3.3.2 Confidential Information does not include information, technical
data or know-how which (i) is in ChinaVest's possession at the time of
disclosure as shown by ChinaVest's files and records immediately prior to the
time of disclosure; (ii) before or after it has been disclosed to ChinaVest, it
is part of the public knowledge or literature, not as a result of any action or
inaction of ChinaVest; or (iii) is disclosed to ChinaVest on a non-confidential
basis by a third party having a legal right to such information, (iv) is
independently developed by ChinaVest, as properly documented by ChinaVest, or
(v) is approved for release by written authorization of Company. The provisions
of this Section shall not apply (i) to the extent that an ChinaVest is required
to disclose Confidential Information pursuant to any law, statue, rule or
regulation or any order of any court or jurisdiction process or pursuant to any
direction, request or requirement (whether or not having the force of law but if
not having the force of law being of a type with which institutional investors
in the relevant jurisdiction are accustomed to comply) of any self-regulating
organization or any governmental, fiscal, monetary or other authority; (ii) to
the disclosure of Confidential Information to ChinaVest's employees, counsel,
accountants or other professional advisors; (iii) to the extent that ChinaVest
needs to disclose Confidential Information for the protection of any of such
ChinaVest's rights or interest against the Company, whether under this Agreement
or otherwise; or (iv) to the disclosure of Confidential Information to a
prospective transferee of securities which agrees to be bound by the provisions
of this Section in connection with the receipt of such Confidential Information.
3.4 RESERVATION OF COMMON STOCK. The Company will at all times reserve and
keep available, solely for issuance and delivery upon the conversion of the
Series A Preferred Stock, all Common Stock issuable from time to time upon such
conversion.
3.5 STOCK VESTING. Unless otherwise approved by the Board of Directors,
all stock options and other stock equivalents issued after the date of this
Agreement to employees, directors, consultants and other service providers shall
be subject to vesting as follows: (i) twenty-five percent (25%) of such stock
shall vest at the end of the first year following the earlier of the date of
issuance or such person's services commencement date with the company, and (ii)
seventy-five percent (75%) of such stock shall vest over the remaining three (3)
years. With respect to any shares of stock purchased by any such person, the
Company's repurchase
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option shall provide that upon such person's termination of employment or
service with the Company, with or without cause, the Company or its assignee (to
the extent permissible under applicable securities laws and other laws) shall
have the option to purchase at cost any unvested shares of stock held by such
person.
3.6 BOARD OF DIRECTORS APPROVAL. The Company shall not, without the
approval of the member of the Board of Directors elected by the Series A
Preferred Stock,
(a) issue any equity securities of the Company (including any
security convertible into or exercisable for any equity security); provided,
however, this provision shall not apply to (x) the issuance of options or rights
to purchase shares of Common under any Company stock option plan, stock purchase
plan, stock incentive plan or similar stock plans and to the issuance of Common
upon exercise thereof and (y) the issuance of Common in connection with the
Company's Initial Offering;
(b) effect any sale, lease, assignment, transfer, or other conveyance
of all or substantially all of the assets of the Company or any of its
subsidiaries, or any consolidation, merger or reorganization of the Company in
which the stockholders of the Company prior to such consolidation, merger or
reorganization do not own a majority of the outstanding shares of the surviving
corporation;
(c) select new auditors of the Company, or materially change the
Company's accounting methods;
(d) amend or repeal any provision of, or add any provision to, the
Company's Bylaws;
(e) acquire any company by purchase, merger or otherwise;
(f) adopt or implement any new employee stock option or stock
incentive plan, or amend the Company's 1996 Stock Incentive Plan; or
(g) engage in any material, non-customary transaction with any direct
or indirect affiliate of the Company or Cortelco Systems Holding Corp. For
purposes of this Section 3.6(g), a transaction shall be deemed customary if it
is a type of transaction substantially similar to a transaction that is
described and identified as customary on the Schedule of Exceptions delivered at
the Closing (as defined in the Purchase Agreement) or if it is an arm's-length
transaction that has been approved by a majority of the disinterested directors
of the Company.
3.7 TERMINATION OF COVENANTS. All covenants of the Company contained in
Article 3 of this Agreement shall expire and terminate on the effective date of
the registration statement pertaining to the Initial Offering.
ARTICLE 4
RIGHTS OF FIRST REFUSAL
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4.1 SUBSEQUENT OFFERINGS. ChinaVest shall have a right of first refusal to
purchase its pro rata share of all Equity Securities, as defined below, that the
Company may, from time to time, propose to sell and issue after the date of this
Agreement, other than the Equity Securities excluded by Section 4.6 hereof.
ChinaVest's pro rata share is equal to the ratio of (A) the number of shares of
the Company's Common Stock (including all shares of Common Stock issued or
issuable upon conversion of the Shares) which such Purchaser is deemed to be a
holder immediately prior to the issuance of such Equity Securities to (B) the
total number of shares of the Company's outstanding Common Stock (including all
shares of Common Stock issued or issuable upon conversion of the Shares)
immediately prior to the issuance of the Equity Securities and assuming exercise
of all outstanding options and warrants to purchase Securities of the Company.
In the event such calculation must be made prior to the Conversion Calculation
Date, the calculation shall be made as if the Series A Conversion Price were
$0.4393 (subject to adjustments for stock splits, stock dividends and the like).
The term "Equity Securities" shall mean (i) any Common Stock, Preferred Stock or
other security of the Company, (ii) any security convertible, with or without
consideration, into any Common Stock, Preferred Stock or other security
(including any option to purchase such a convertible security), (iii) any
security carrying any warrant or right to subscribe to or purchase any Common
Stock, Preferred Stock or other security or (iv) any such warrant or right.
4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity
Securities, it shall give ChinaVest written notice of its intention, describing
the Equity Securities, the price and the terms and conditions upon which the
Company proposes to issue the same. ChinaVest shall have fifteen (15) days from
the giving of such notice to agree to purchase its pro rata share of the Equity
Securities for the price and upon the terms and conditions specified in the
notice by giving written notice to the Company and stating therein the quantity
of Equity Securities to be purchased. Notwithstanding the foregoing, the
Company shall not be required to offer or sell such Equity Securities to
ChinaVest if such offer or sale would in the judgment of counsel for the Company
cause the Company to be in violation of applicable federal securities laws.
4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If ChinaVest does not
elect to purchase its pro rata share of the Equity Securities, then the Company
shall have one hundred twenty (120) days thereafter to sell the Equity
Securities in respect of which ChinaVest's rights were not exercised, at a price
and upon general terms and conditions no more favorable to the purchasers
thereof than specified in the Company's notice to ChinaVests pursuant to Section
4.2 hereof. If the Company has not sold such Equity Securities within days of
the notice provided pursuant to Section 4.2, the Company shall not thereafter
issue or sell any Equity Securities, without first offering such securities to
ChinaVests in the manner provided above.
4.4 TERMINATION OF RIGHTS OF FIRST REFUSAL. The rights of first refusal
established by this Article 4 shall terminate upon the effective date of the
registration statement pertaining to the Initial Offering.
4.5 TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal of
ChinaVest under this Article 4 may be transferred among ChinaVest IV, ChinaVest
IV-A and ChinaVest IV-B, subject to the same restrictions as any transfer of
registration rights pursuant to Section 2.10.
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4.6 EXCLUDED SECURITIES. The rights of first refusal established by this
Article 4 shall have no application to any of the following Equity Securities:
4.6.1 options, warrants or other Common Stock purchase rights or
Common Stock issued pursuant to such options, warrants or other rights) issued
or to be issued to employees, officers or directors of, or consultants or
advisors to the Company or any subsidiary, pursuant to stock purchase or stock
option plans or other arrangements that are approved by the Board of Directors;
4.6.2 stock issued pursuant to any rights, options, warrants or
agreements outstanding as of the date of this Agreement; and stock issued
pursuant to any such rights, options, warrants or agreements granted after the
date of this Agreement, provided that the rights of first refusal established by
this Article 4 applied with respect to the initial sale or grant by the Company
of such rights or agreements;
4.6.3 any Equity Securities issued for consideration other than cash
pursuant to a merger, consolidation, acquisition or similar business
combination;
4.6.4 shares of Common Stock issued in connection with any stock
split, stock dividend or recapitalization by the Company;
4.6.5 shares of Common Stock issued upon conversion of the Shares;
4.6.6 any Equity Securities issued pursuant to any equipment leasing
arrangement or bank financing;
4.6.7 any Equity Securities that are issued by the Company pursuant to
a registration statement filed under the Securities Act; and
4.6.8 shares of the Company's Common Stock or Preferred Stock issued
in connection with strategic transactions involving the Company and other
entities, including (A) joint ventures, manufacturing, marketing or distribution
arrangements or (B) technology transfer or development arrangements; provided
that such strategic transactions and the issuance of shares therein, has been
approved by the Company's Board of Directors in accordance with the terms
hereof.
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ARTICLE 5
MISCELLANEOUS
5.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
5.2 SURVIVAL. The representations, warranties, covenants, and agreements
made herein shall survive any investigation made by any Holder and the closing
of the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.
5.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a Holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the Holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
5.4 SEVERABILITY. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
5.5 AMENDMENT AND WAIVER.
5.5.1 Except as otherwise expressly provided, this Agreement may be
amended or modified only upon the written consent of the Company and the Holders
of a majority of the Registrable Securities (which majority must include
ChinaVest for so long as ChinaVest holds or is deemed to hold at least 2,000,000
shares of Registrable Securities, as presently constituted).
5.5.2 Except as otherwise expressly provided, the obligations of the
Company and the rights of the Holders under this Agreement may be waived only
with the written consent of the Holders of a majority of the Registrable
Securities (which majority must include ChinaVest for so long as ChinaVest holds
or is deemed to hold at least 2,000,000 share of Registrable Securities, as
presently constituted).
5.6 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
19
<PAGE>
agreed that any waiver, permit, consent, or approval of any kind or character on
any Holder's part of any breach, default or noncompliance under the Agreement or
any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not
alternative.
5.7 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified, (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next business
day, (iii) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (iv) one (1) day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. All communications shall be sent to the
party to be notified at the address as set forth on the signature pages hereof
or at such other address as such party may designate by ten (10) days advance
written notice to the other parties hereto.
5.8 ATTORNEYS' FEES. In the event that any dispute among the parties to
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
5.9 TITLES AND SUBTITLES. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
5.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
5.11 SPECIAL PROVISION REGARDING ALCATEL. Notwithstanding anything to the
contrary contained or implied herein, this Agreement shall not affect in any way
the rights of Alcatel Network Systems, Inc. ("Alcatel") pursuant to that certain
CSHC Pledge Agreement (the "CSHC Pledge Agreement") dated as of December 16,
1993 executed by Founder in favor of Alcatel, as amended, or that certain New
Pledge Agreement (the "New Pledge Agreement") dated as of August 23, 1993
executed by Founder in favor of Alcatel, and this Agreement shall not apply to,
limit, restrict or prohibit in any manner the exercise by Alcatel of any such
rights including, without limitatioin, any transfer of capital stock of the
Company pursuant to the CSHC Pledge Agreement or the New Pledge Agreement (the
"Stock Transfer"). Notwithstanding anything to the contrary contained or
implied herein, this Agreement shall automatically terminate upon any Stock
Transfer. Notwithstanding anything to the contrary contained or implied herein,
this Section 5,11 cannot be amended without the written consent of Alcatel, and
Alcatel shall be entitled to enforce the provisions hereof against the parties
hereto.
[THIS SPACE INTENTIONALLY LEFT BLANK]
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Investor Rights
Agreement as of the date set forth in the first paragraph hereof.
COMPANY: CHINAVEST
INVESTORS:
CORTELCO SYSTEMS, INC. CHINAVEST IV, L.P.
By: /s/
--------------------------- By: /s/
Steve Bowling -----------------------------
President Print Name:_____________________
Address:_______________________ Title:__________________________
_______________________________
Address:________________________
_______________________________ ________________________________
________________________________
FOUNDER:
CORTELCO SYSTEMS HOLDING CORP. CHINAVEST IV-A, L.P.
By: /s/ By: /s/
----------------------------- -----------------------------
Print Name:____________________ Print Name:_____________________
Title:_________________________ Title:__________________________
Address:_______________________ Address:________________________
_______________________________ ________________________________
_______________________________ ________________________________
CHINAVEST IV-B, L.P.
By: /s/
-----------------------------
Print Name:_____________________
Title:__________________________
Address:________________________
________________________________
________________________________
21
<PAGE>
EXHIBIT 4.3
___________________________________
Registration Rights Agreement
by and between
CMC Industries, Inc.
and
Cortelco Systems, Inc.
March 15, 1999
___________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. DEFINITIONS.......................................................... 1
1.1 Registration................................................ 1
1.2 Registrable Securities...................................... 1
1.3 Holder...................................................... 1
1.4 Form S-3.................................................... 1
1.5 SEC......................................................... 1
2. PIGGYBACK REGISTRATIONS.............................................. 2
2.1 Underwriting................................................ 2
2.2 Expenses.................................................... 3
3. FORM S-3 REGISTRATION................................................ 3
3.1 Notice...................................................... 3
3.2 Registration................................................ 3
3.3 Expenses.................................................... 4
4. OBLIGATIONS OF THE COMPANY........................................... 4
5. FURNISH INFORMATION.................................................. 5
6. [INTENTIONALLY OMITTED].............................................. 5
7. INDEMNIFICATION...................................................... 5
7.1 By the Company.............................................. 5
7.2 By Selling Holders.......................................... 6
7.3 Notice...................................................... 6
7.4 Defect Eliminated in Final Prospectus....................... 7
7.5 Contribution................................................ 7
7.6 Survival.................................................... 8
8. "MARKET STAND-OFF" AGREEMENT......................................... 8
9. RULE 144 REPORTING................................................... 8
10. TERMINATION OF THE COMPANY'S OBLIGATIONS............................. 9
11. ASSIGNMENT AND AMENDMENT............................................. 9
11.1 Assignment.................................................. 9
11.2 Amendment of Rights......................................... 9
12. REPRESENTATIONS, WARRANTIES AND COVENANTS............................ 9
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
12.1 Capital Stock.............................................. 9
12.2 Authority Relative to this Agreement....................... 10
12.3 No Conflict; Required Filings and Consents................. 11
12.4 Financial Statements and No Material Changes............... 11
12.5 Liabilities................................................ 12
12.6 CSI Covenants.............................................. 12
13. GENERAL PROVISIONS.................................................. 12
13.1 Notices.................................................... 12
13.2 Entire Agreement........................................... 12
13.3 Governing Law.............................................. 13
13.4 Severability............................................... 13
13.5 Third Parties.............................................. 13
13.6 Successors And Assigns..................................... 13
13.7 Captions................................................... 13
13.8 Counterparts............................................... 13
13.9 Costs And Attorneys' Fees.................................. 13
</TABLE>
ii
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is entered into by and
between CMC Industries, Inc. ("CMC") and Cortelco Systems, Inc. (the "Company")
as of March 15, 1999.
WHEREAS, CMC is or will be the recipient of common stock of the Company
upon the distribution thereof to CMC by Cortelco Systems Holding Corp. ("CSHC"),
and
WHEREAS, as an inducement to Holder to facilitate such distribution and
participate therein, the Company has agreed to grant CMC certain registration
rights on the terms and conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the covenants agreements set forth
herein, and for good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. DEFINITIONS.
1.1 REGISTRATION. The terms "REGISTER," "REGISTERED" and
"REGISTRATION" refer to a registration effected by preparing and filing a
registration statement in compliance with the 1933 Act, and the declaration or
ordering of effectiveness of such registration statement.
1.2 REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES" means:
(a) all the shares of Common Stock of the Company issued or issuable from time
to time to CMC and (b) any shares of Common Stock issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, all such shares of Common Stock described in clause (a) of
this Section 1.2, excluding in all cases, however, any Registrable Securities
sold by a person in a transaction in which rights under this Agreement are not
assigned in accordance with this Agreement or any Registrable Securities sold to
the public or sold pursuant to Rule 144 promulgated under the 1933 Act.
1.3 HOLDER. For purposes of this Agreement, the term "HOLDER" means
CMC and/or any assignee of record of Registrable Securities to whom rights under
this Agreement have been duly assigned in accordance with this Agreement.
1.4 FORM S-3. The term "FORM S-3" means such form under the 1933 Act
as is in effect on the date hereof or any successor registration form under the
1933 Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
1.5 SEC. The term "SEC" or "COMMISSION" means the U.S. Securities and
Exchange Commission.
1.
<PAGE>
2. PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities in writing at least ten (10) days prior to filing any
registration statement under the 1933 Act for purposes of effecting a public
offering of securities of the Company (including, but not limited to,
registration statements relating solely to secondary offerings of securities of
the Company, but excluding registration statements on Form S-8 or Form S-4
relating to any employee benefit plan or a corporate reorganization) and will
afford each such Holder an opportunity to include in such registration statement
all or any part of the Registrable Securities then held by such Holder. Each
Holder desiring to include in any such registration statement all or any part of
the Registrable Securities held by such Holder shall, within twenty (20) days
after receipt of the above-described notice from the Company, so notify the
Company in writing, and in such notice shall inform the Company of the number of
Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
2.1 UNDERWRITING. If a registration statement under which the Company
gives notice under this Section 2 is for an underwritten offering, then the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriter(s) selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the managing
underwriter determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriter(s) may exclude shares (including Registrable Securities) from the
registration and the underwriting, and the number of shares that may be included
in the registration and the underwriting shall be allocated, first, to the
Company, and second, to each of the Holders requesting inclusion of their
Registrable Securities in such registration statement on a pro rata basis based
on the total number of Registrable Securities then held by each such Holder;
provided, however, that the right of the underwriters to exclude shares
(including Registrable Securities) from the registration and underwriting as
described above shall be restricted so that (i) the number of Registrable
Securities included in any such registration is not reduced below seventeen and
one-half percent (17.5%) of the shares included in the registration, and (ii)
any such exclusion shall be allocated pro rata among selling stockholders on the
basis of the number of shares proposed to be sold in the underwriting, provided
that Registerable Securities shall comprise not less than forty percent (40%) of
the shares to be sold by such selling stockholders. If any Holder disapproves of
the terms of any such underwriting, such Holder may elect to withdraw therefrom
by written notice to the Company and the underwriter, delivered at least two (2)
days prior to the effective date of the registration statement. Any Registrable
Securities excluded or withdrawn from such underwriting shall be excluded and
withdrawn from the registration.
2.
<PAGE>
2.2 EXPENSES. All expenses incurred in connection with a registration
pursuant to this Section 2 (excluding underwriters' and brokers' discounts and
commissions), including, without limitation all federal and "blue sky"
registration and qualification fees, printers' and accounting fees, fees and
disbursements of counsel for the Company shall be borne by the Company.
3. FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders of Registrable Securities a written request or requests that
the Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, then the Company will:
3.1 NOTICE. Promptly give written notice of the proposed registration
and the Holder's or Holders' request therefor, and any related qualification or
compliance, to any other Holders of Registrable Securities; and
3.2 REGISTRATION. As soon as practicable, effect such registration
and all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within ten (10) days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to effect
any such registration, qualification or compliance pursuant to this Section 3:
(A) if Form S-3 is not available for such offering by the
Holders;
(B) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an aggregate
price to the public of less than $500,000;
(C) if the Company shall furnish to the Holders a certificate
signed by the President or Chief Executive Officer of the Company stating that
in the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its stockholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement no more
than once during any twelve month period for a period of not more than 90 days
after receipt of the request of the Holder or Holders under this Section 3;
(D) if the Company has, within the twelve (12) month period
preceding the date of such request, already effected two (2) registrations on
Form S-3 for the Holders pursuant to this Section 3; or
(E) in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to service of
process in effecting such registration, qualification or compliance and where
the Company has not previously qualified to do business or given such a general
consent to service in such jurisdiction.
3.
<PAGE>
3.3 EXPENSES. Subject to the foregoing, the Company shall file a Form
S-3 registration statement covering the Registrable Securities and other
securities so requested to be registered pursuant to this Section 3 as soon as
practicable after receipt of the request or requests of the Holders for such
registration. The Company shall pay all expenses incurred in connection with
each registration requested pursuant to this Section 3, (excluding underwriters'
or brokers' discounts and commissions), including without limitation all filing,
registration and qualification, printers' and accounting fees and counsel for
the Company.
4. OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:
4.1 Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to ninety (90) days.
4.2 Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement.
4.3 Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by them that are
included in such registration.
4.4 Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
4.5 In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such agreement.
4.6 Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
4.
<PAGE>
4.7 Furnish, at the request of any Holder requesting registration of
Registrable Securities, on the date that such Registrable Securities are
delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and (ii) a "comfort"
letter dated as of such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering
and reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
5. FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 2 or 3 that
the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to timely effect the
registration of their Registrable Securities.
6. [INTENTIONALLY OMITTED].
7. INDEMNIFICATION. In the event any Registrable Securities are included
in a registration statement under Sections 2 or 3:
7.1 BY THE COMPANY. To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners, officers and directors of
each Holder, any underwriter (as defined in the 1933 Act) for such Holder and
each person, if any, who controls such Holder or underwriter within the meaning
of the 1933 Act or the Securities Exchange Act of 1934, as amended, (the "1934
ACT"), against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the 1933 Act, the 1934 Act or other federal
or state law, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively, a "VIOLATION"):
(A) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto;
(B) the omission or alleged omission to state therein a material
fact required to be stated therein, or necessary to make the statements therein
not misleading; or
(C) any violation or alleged violation by the Company of the
1933 Act, the 1934 Act, any federal or state securities law or any rule or
regulation promulgated under the 1933 Act, the 1934 Act or any federal or state
securities law in connection with the offering
5.
<PAGE>
covered by such registration statement; and the Company will reimburse each such
Holder, partner, officer or director, underwriter or controlling person for any
legal or other expenses reasonably incurred by them, as incurred, in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
Section 7.1 shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld), nor
shall the Company be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
such Holder, partner, officer, director, underwriter or controlling person of
such Holder.
7.2 BY SELLING HOLDERS. To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who have signed the registration statement, each person, if any,
who controls the Company within the meaning of the 1933 Act, any underwriter and
any other Holder selling securities under such registration statement or any of
such other Holder's partners, directors or officers or any person who controls
such Holder within the meaning of the 1933 Act or the 1934 Act, against any
losses, claims, damages or liabilities (joint or several) to which the Company
or any such director, officer, controlling person, underwriter or other such
Holder, partner or director, officer or controlling person of such other Holder
may become subject under the 1933 Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, controlling person, underwriter or other Holder,
partner, officer, director or controlling person of such other Holder in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 7.2 shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably withheld; and
provided further, that the total amounts payable in indemnity by a Holder under
this Section 7.2 in respect of any Violation shall not exceed the net proceeds
received by such Holder in the registered offering out of which such Violation
arises.
7.3 NOTICE. Promptly after receipt by an indemnified party under this
Section 7.3 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 7.3, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential
6.
<PAGE>
conflict of interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 7.3, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 7.3.
7.4 DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing indemnity
agreements of the Company and Holders are subject to the condition that, insofar
as they relate to any Violation made in a preliminary prospectus but eliminated
or remedied in the amended prospectus on file with the SEC at the time the
registration statement in question becomes effective or the amended prospectus
filed with the SEC pursuant to SEC Rule 424(b) (the "FINAL PROSPECTUS"), such
indemnity agreement shall not inure to the benefit of any person if a copy of
the Final Prospectus was furnished to the indemnified party and was not
furnished to the person asserting the loss, liability, claim or damage at or
prior to the time such action is required by the 1933 Act.
7.5 CONTRIBUTION. In order to provide for just and equitable
contribution to joint liability under the 1933 Act in any case in which either
(i) any Holder exercising rights under this Agreement, or any controlling person
of any such Holder, makes a claim for indemnification pursuant to this Section 7
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, or (ii) contribution under the 1933 Act may be
required on the part of any such selling Holder or any such controlling person
in circumstances for which indemnification is provided under this Section 7;
then, and in each such case, the Company and such Holder will contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion as is appropriate to reflect
the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the acts or omissions which
resulted in such loss, claim, damage or liability, as well as any other relevant
equitable considerations; provided, however, that, in any such case, (A) no such
Holder will be required to contribute any amount in excess of the public
offering price of all such Registrable Securities offered and sold by such
Holder pursuant to such registration statement; and (B) no person or entity
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) will be entitled to contribution from any person or entity who was
not guilty of such fraudulent misrepresentation.
7.6 SURVIVAL. The obligations of the Company and Holders under this
Section 7 shall survive the completion of any offering of Registrable Securities
in a registration statement, and otherwise.
8. "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that it shall
not, to the extent requested by the Company or an underwriter of securities of
the Company, sell or otherwise transfer or dispose of any Registrable Securities
or other shares of stock of the
7.
<PAGE>
Company then owned by such Holder (other than to donees or partners of the
Holder who agree to be similarly bound or to any officer or director of the
Company) from the effective date of a registration statement of the Company
filed under the 1933 Act until up to one-hundred eighty (180) days following
such effective date; provided, however, that:
(A) such agreement shall be applicable only to the first such
registration statement of the Company which covers securities to be sold on its
behalf to the public in an underwritten offering but not to Registrable
Securities sold pursuant to such registration statement; and
(B) all officers and directors of the Company then holding
Common Stock of the Company and all beneficial holders of 5% or more of the
Company's Common Stock enter into similar agreements.
In order to enforce the foregoing covenant, the Company shall have the right to
place restrictive legends on the certificates representing the shares subject to
this Section and to impose stop transfer instructions with respect to the
Registrable Securities and such other shares of stock of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
9. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to:
(A) make and keep public information available, as those terms
are understood and defined in Rule 144 promulgated under the 1933 Act, at all
times after the effective date of the first registration under the 1933 Act
filed by the Company for an offering of its securities to the general public;
(B) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the 1933
Act and the 1934 Act (at any time after it has become subject to such reporting
requirements); and
(C) so long as a Holder owns any Registrable Securities, furnish
to the Holder forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of Rule 144 (at any time after
ninety (90) days after the effective date of the first registration statement
filed by the Company for an offering of its securities to the general public),
and of the 1933 Act and the 1934 Act (at any time after it has become subject to
the reporting requirements of the 1934 Act), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration (at any time after the Company has become subject to the
reporting requirements of the 1934 Act).
8.
<PAGE>
10. TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company shall have no
obligations pursuant to Sections 2 through 9 with respect to: (a) any request or
requests for registration made by any Holder on a date more than five (5) years
after the closing date of the Company's initial public offering; or (b) any
Registrable Securities proposed to be sold by a Holder in a registration
pursuant to Section 2 (other than in the initial public offering by the Company)
or 3 if, in the opinion of counsel to the Company, all such Registrable
Securities proposed to be sold by a Holder may be sold in a three-month period
without registration under the 1933 Act pursuant to Rule 144 promulgated under
the 1933 Act.
11. ASSIGNMENT AND AMENDMENT.
11.1 ASSIGNMENT. The registration rights of a Holder hereunder may be
assigned only to a party who acquires at least ten percent (10%) of the
Registrable Securities issued to CMC in the CSHC distribution; provided,
however, that no party may be assigned any of the foregoing rights unless the
Company is given written notice by the assigning party at the time of such
assignment stating the name and address of the assignee and identifying the
securities of the Company of which the rights in question are being assigned;
and provided further that any such assignee shall receive such assigned rights
subject to all the terms and conditions of this Agreement, including without
limitation and the provisions of this Section.
11.2 AMENDMENT OF RIGHTS. Any provision of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of a majority of the Registrable
Securities then outstanding. Any amendment or waiver effected in accordance with
this Section 11.2 shall be binding upon each Holder, each permitted successor or
assignee of such Holder and the Company.
12. REPRESENTATIONS, WARRANTIES AND COVENANTS.
12.1 CAPITAL STOCK. The Company has an authorized capitalization
consisting of 81,000,000 shares of common stock, $.0001 par value, of which
31,706,871 shares are issued and outstanding, 3,347,669 shares a unissued but
authorized for issuance pursuant to issued stock options, and 14,632,062 shares
of preferred stock, $.0001 par value, of which 14,632,062 shares have been
designated as Series A, none of which are issued and outstanding. All such
outstanding shares have been duly authorized and validly issued and are fully
paid and nonassessable. The Company intends to enter into a Merger Agreement
with BCS Technologies, Inc. ("BCS") pursuant to which a subsidiary of the
Company will merge with and into BCS (the "Merger"), the former stockholders of
BCS will receive an aggregate of 39,811,807 shares of the Company's Common
Stock, and an additional 964,955 shares of Common Stock will be reserved for
issuance upon exercise of outstanding BCS stock options assumed in the Merger.
Immediately prior to the Merger, the Company plans to issue 5,700,868 shares of
Common Stock to CSHC in connection with the acquisition of Cortelco Puerto Rico,
Inc. In connection with the Merger, the Company also intends to effect a reverse
split of the Company's Common Stock by means of amendment of its Certificate of
Incorporation changing the par value per share of the Company's Common Stock
from $.0001 to $.001, and convert each share of the Company's Common Stock
outstanding at the effective time of the amendment into one-tenth (1/10th) share
9.
<PAGE>
of the Company's Common Stock (the "Reverse Split"). Such amendment shall change
the par value per share of each share of Series A Preferred Stock of the Company
from $.0001 to $.001, with a corresponding reduction in the number of shares of
Series A Preferred Stock authorized. In addition to the foregoing changes, the
Certificate of Incorporation of the Company shall be further amended to increase
the authorized Company Common Stock (after consideration of the effect of the
Reverse Split) to 50,000,000 shares and increase the authorized Series A
Preferred Stock (after consideration of the effect of the Reverse Split) to
5,000,000 shares. After taking into account the effects of the Puerto Rico
acquisition and the Merger (but not the Reverse Split), immediately after the
Merger, 77,219,546 shares of the Company's Common Stock will be issued and
outstanding, 10,450,470 shares will be unissued but authorized for issuance
pursuant to issued stock options, and 14,348,944 shares will be unissued but
authorized for issuance pursuant to conversion rights under the Series A
Preferred Stock (all of such shares totaling 102,018,960 shares). There are no
subscriptions, options, warrants, equity securities, partnership interests or
similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which CSI is a party or by which
it is bound obligating CSI to issue, deliver or sell, or cause to be issued,
delivered or sold, or repurchase, redeem or otherwise acquire, or cause the
repurchase, redemption or acquisition of, any shares of capital stock,
partnership interests or similar ownership interests of CSI or obligating CSI to
grant, extend, accelerate the vesting of or enter into any such subscription,
option, warrant, equity security, call, right, commitment or agreement.
12.2 AUTHORITY RELATIVE TO THIS AGREEMENT. CSI has all necessary
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by CSI and the
consummation by CSI of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part of CSI and no
other corporate proceedings on the part of CSI are necessary to authorize this
Agreement or to consummate the transactions so contemplated. This Agreement has
been duly and validly executed and delivered by CSI and, assuming the due
authorization, execution and delivery by CMC, constitutes legal and binding
obligations of CSI, enforceable against CSI in accordance with its terms, except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting
enforcement of creditor's rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, or (ii) to the extent this Agreement may be limited by applicable
federal or state securities laws or public policy considerations.
12.3 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(A) The execution and delivery of this Agreement does not, and
the performance of this Agreement or the Registration Rights Agreement by CSI
shall not, (i) conflict with or violate the Certificate of Incorporation or
Bylaws of CSI, (ii) conflict with or violate any law, rule, regulation, order,
judgement or decree applicable to CSI or by which its properties is bound or
affected, or (iii) result in any breach of or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, or
impair CSI's rights or alter the rights or obligations of any third party under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on
10.
<PAGE>
any of the properties or assets of CSI pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which CSI is a party or by which CSI or its
properties are bound or affected.
(B) The execution and delivery of this Agreement and the
Registration Rights Agreement do not, and the performance of this Agreement and
the Registration Rights Agreement by CSI shall not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
court, administrative agency, commission, governmental or regulatory authority,
domestic or foreign, except (A) for the applicable requirements, if any, of the
Securities Act, the Exchange Act, the Blue Sky Laws and (B) where the failure to
obtain such consent, approvals, authorizations or permits, or to make such
filings or notifications, would not be material to the CSI or have a material
Adverse effect on the parties hereto, prevent consummation of the transactions
contemplated by this Agreement or otherwise prevent the parties hereto from
performing their obligations under this Agreement.
12.4 FINANCIAL STATEMENTS AND NO MATERIAL CHANGES. The Company has
heretofore furnished CMC with the unaudited balance sheets of the Company as of
January 31, 1999, and as of July 31, 1998, and the related statements of income,
cash flow and stockholders' equity for the periods then ended (the "Company
Financial Statements"). Such financial statements have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods indicated; provided, however, that certain year-end audit
adjustments have not been made and such financial statements omit footnotes
otherwise required by generally accepted accounting principles. The balance
sheets included in the Company Financial Statements fairly present the financial
condition of the Company at the dates thereof and, except as indicated therein,
reflect all claims against and all debts and liabilities of the Company, fixed
or contingent, as at the dates thereof; and the related statements of income,
cash flow and stockholders' equity fairly present the results of the operations
of the Company. Since January 31, 1999, there has been (i) no material adverse
change in the Company, whether as a result of any legislative or regulatory
change, revocation of any license or rights to do business, fire, explosion,
accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or
action of God or other public force or otherwise and (ii) to Company's
knowledge, no fact or condition exists or is contemplated or threatened which
might cause such a material adverse change in the future.
12.5 LIABILITIES. The Company has no outstanding claims, liabilities
or indebtedness, contingent or otherwise, except as set forth in the Company
Financial Statements or referred to in any footnotes thereto, other than
liabilities incurred subsequent to January 31, 1999 in the ordinary course of
business. The Company is not in default in respect of the terms or conditions of
any indebtedness.
12.6 CSI COVENANTS. The Company covenants and agrees that it will use
its best efforts to complete the Merger within thirty (30) days of the date of
this Agreement.
13. GENERAL PROVISIONS.
11.
<PAGE>
13.1 NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or if deposited in the U.S. mail by registered or
certified mail, return receipt requested, postage prepaid, as follows:
(A) if to CMC, at:
CEO and CFO
CMC Industries, Inc.
4950 Patrick Henry Drive
Santa Clara, CA 95054
with a copy to:
Marty Korman
Peter Bergman
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
(B) if to the Company, at:
President
Cortelco Systems, Inc.
4119 Willow Lake Blvd.
Memphis, Tennessee 38118
Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. Notice shall conclusively be
deemed to have been given when personally delivered or when deposited in the
mail in the manner set forth above.
13.2 ENTIRE AGREEMENT. This Agreement, together with all the Exhibits
hereto, constitutes and contains the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties respecting the registration rights of CMC
described herein.
13.3 GOVERNING LAW. This Agreement shall be governed by and construed
exclusively in accordance with the internal laws of the State of California as
applied to agreements among California residents entered into and to be
performed entirely within California, excluding that body of law relating to
conflict of laws and choice of law.
13.4 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, then such provision(s) shall be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
12.
<PAGE>
13.5 THIRD PARTIES. Nothing in this Agreement, express or implied, is
intended to confer upon any person, other than the parties hereto and their
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.6 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section
11.1, the provisions of this Agreement shall inure to the benefit of, and shall
be binding upon, the successors and permitted assigns of the parties hereto.
13.7 CAPTIONS. The captions to sections of this Agreement have been
inserted for identification and reference purposes only and shall not be used to
construe or interpret this Agreement.
13.8 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
13.9 COSTS AND ATTORNEYS' FEES. In the event that any action, suit or
other proceeding is instituted concerning or arising out of this Agreement or
any transaction contemplated hereunder, the prevailing party shall recover all
of such party's costs and attorneys' fees incurred in each such action, suit or
other proceeding, including any and all appeals or petitions therefrom.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
13.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
THE COMPANY: HOLDER:
CORTELCO SYSTEMS, INC. CMC INDUSTRIES, INC.
By: /s/ By: /s/
---------------------------- ---------------------------
Title: ________________________ Title: _______________________
<PAGE>
EXHIBIT 10.1
$7,500,000
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
CORTELCO SYSTEMS, INC.
AND
FOOTHILL CAPITAL CORPORATION
DATED AS OF JULY 31, 1997
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
1. DEFINITIONS AND CONSTRUCTION................................................................. 1
1.1 Definitions............................................................................. 1
1.2 Accounting Terms........................................................................ 14
1.3 Code.................................................................................... 14
1.4 Construction............................................................................ 14
1.5 Schedules and Exhibits.................................................................. 15
2. LOAN AND TERMS OF PAYMENT.................................................................... 15
2.1 Revolving Advances...................................................................... 15
2.2 Letters of Credit....................................................................... 16
2.3 Overadvances............................................................................ 18
2.4 Interest and Letter of Credit Fees: Rates, Payments, and Calculations; Promise to Pay.. 18
2.5 Collection of Accounts.................................................................. 20
2.6 Crediting Payments; Application of Collections.......................................... 20
2.7 Designated Account...................................................................... 21
2.8 Maintenance of Loan Account; Statements of Obligations.................................. 21
2.9 Fees.................................................................................... 21
2.10 Tax Indemnity........................................................................... 22
3. CONDITIONS; TERM OF AGREEMENT................................................................ 24
3.1 Conditions Precedent to the Initial Advance and Letter of Credit........................ 24
3.2 Conditions Precedent to all Advances and all Letters of Credit.......................... 25
3.3 Condition Subsequent.................................................................... 26
3.4 Term.................................................................................... 26
3.5 Effect of Termination................................................................... 26
3.6 Early Termination by Borrower........................................................... 26
3.7 Termination Upon Event of Default....................................................... 26
4. CREATION OF SECURITY INTEREST................................................................ 27
4.1 Grant of Security Interest.............................................................. 27
4.2 Negotiable Collateral................................................................... 27
4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral.................. 27
</TABLE>
i.
<PAGE>
Table of Contents
(Continued)
<TABLE>
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<S> <C>
4.4 Delivery of Additional Documentation Required........................................... 27
4.5 Power of Attorney....................................................................... 27
4.6 Right to Inspect........................................................................ 28
5. REPRESENTATIONS AND WARRANTIES............................................................... 28
5.1 No Encumbrances......................................................................... 28
5.2 Eligible Accounts....................................................................... 28
5.3 Eligible Inventory...................................................................... 29
5.4 Equipment............................................................................... 29
5.5 Location of Inventory and Equipment..................................................... 29
5.6 Inventory Records....................................................................... 29
5.7 Location of Chief Executive Office; FEIN................................................ 29
5.8 Due Organization and Qualification; Subsidiaries........................................ 29
5.9 Due Authorization; No Conflict.......................................................... 30
5.10 Litigation.............................................................................. 30
5.11 No Material Adverse Change.............................................................. 31
5.12 Solvency................................................................................ 31
5.13 Employee Benefits....................................................................... 31
5.14 Environmental Condition................................................................. 31
6. AFFIRMATIVE COVENANTS........................................................................ 31
6.1 Accounting System....................................................................... 32
6.2 Collateral Reporting.................................................................... 32
6.3 Financial Statements, Reports, Certificates............................................. 32
6.4 Tax Returns............................................................................. 34
6.5 Guarantor Reports....................................................................... 34
6.6 Returns................................................................................. 34
6.7 Title to Equipment...................................................................... 34
6.8 Maintenance of Equipment................................................................ 34
6.9 Taxes................................................................................... 34
6.10 Insurance............................................................................... 35
6.11 No Setoffs or Counterclaims............................................................. 36
</TABLE>
SCHEDULES AND EXHIBITS
----------------------
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule 5.8 Shareholders and Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Indebtedness as of Closing Date
Schedule 7.13 Investments
Exhibit P-1 Projections
ii.
<PAGE>
Table of Contents
(Continued)
<TABLE>
<CAPTION>
Page
<S> <C>
6.12 Location of Inventory and Equipment..................................................... 36
6.13 Compliance with Laws.................................................................... 36
6.14 Employee Benefits....................................................................... 36
6.15 Leases.................................................................................. 37
7. NEGATIVE COVENANTS............................................................................ 37
7.1 Indebtedness............................................................................ 37
7.2 Liens................................................................................... 38
7.3 Restrictions on Fundamental Changes..................................................... 38
7.4 Sale or Disposal of Assets.............................................................. 38
7.5 Change Name............................................................................. 38
7.6 Guarantee............................................................................... 38
7.7 Nature of Business...................................................................... 38
7.8 Repayments, Prepayments and Amendments.................................................. 38
7.9 Change of Control....................................................................... 39
7.10 Consignments............................................................................ 39
7.11 Distributions........................................................................... 39
7.12 Accounting Methods...................................................................... 39
7.13 Investments............................................................................. 39
7.14 Transactions with Affiliates............................................................ 40
7.15 Suspension.............................................................................. 40
7.16 Compensation............................................................................ 40
7.17 Use of Proceeds......................................................................... 40
7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees...... 40
7.19 No Prohibited Transactions Under ERISA.................................................. 40
8. EVENTS OF DEFAULT............................................................................. 41
9. FOOTHILL'S RIGHTS AND REMEDIES................................................................ 43
9.1 Rights and Remedies..................................................................... 43
9.2 Remedies Cumulative..................................................................... 45
10. TAXES AND EXPENSES............................................................................ 45
</TABLE>
iii.
<PAGE>
Tables of Contents
(Continued)
<TABLE>
<CAPTION>
Page
<S> <C>
11. WAIVERS; INDEMNIFICATION...................................................................... 46
11.1 Demand; Protest; etc.................................................................... 46
11.2 Foothill's Liability for Collateral..................................................... 46
11.3 Indemnification......................................................................... 46
12. NOTICES....................................................................................... 46
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.................................................... 47
14. DESTRUCTION OF BORROWER'S DOCUMENTS........................................................... 48
15. GENERAL PROVISIONS............................................................................ 48
15.1 Effectiveness........................................................................... 48
15.2 Successors and Assigns.................................................................. 48
15.3 Section Headings........................................................................ 49
15.4 Interpretation.......................................................................... 49
15.5 Severability of Provisions.............................................................. 49
15.6 Amendments in Writing................................................................... 49
15.7 Counterparts; Telefacsimile Execution................................................... 49
15.8 Revival and Reinstatement of Obligations................................................ 49
15.9 Integration............................................................................. 49
15.10 Time of the Essence..................................................................... 49
</TABLE>
iv.
<PAGE>
SCHEDULES AND EXHIBITS
----------------------
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule 5.8 Shareholders and Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Indebtedness as of Closing Date
Schedule 7.13 Investments
Exhibit P-1 Projections
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT"), is entered into as of
July 31, 1997, between FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333 and an office located in Atlanta,
Georgia and CORTELCO SYSTEMS, INC., a Delaware corporation ("Borrower"), with
its chief executive office located at 4119 Willow Lake Boulevard, Memphis,
Tennessee 38118.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods or the rendition of services by
Borrower, irrespective of whether earned by performance, and any and all credit
insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section 2.1(a)
"Affiliate" means, as applied to any Person, any other Person,
who directly or indirectly controls, is controlled by, is under common control
with or is a director or Officer of sock Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to vote ten percent (10%) or more of securities having ordinary voting power for
the election of directors or the direct or indirect power to direct the
management and policies of a Person.
"Agreement" has the meaning set forth in the preamble hereto.
"Alcatel" means Alcatel Network System, Inc., a Delaware
corporation.
"Alcatel Debt" means that Indebtedness owing by Cortelco Systems
Holding Corp. to Alcatel pursuant to that certain Promissory Note dated December
16, 1993, in the original principal amount of $8,000,000.
"Authorized Person" means any officer or other employee of
Borrower.
1.
<PAGE>
"Average Unused Portion of Maximum Amount" means, as of any date
of determination, (a) the Maximum Amount, less (b) the sum of (i) the average
Daily Balance of Advances that were outstanding during the immediately preceding
month, plus (ii) the average Daily Balance of the undrawn Letters of Credit that
were outstanding during the immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. (S) 101 et seq.), as amended, and any successor statute.
"Benefit Plan" means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any
ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA)
within the Past six years.
"Borrower" has the meaning set forth in the preamble to this
Agreement.
"Borrower's Books" means all of Borrower's books and records
including: ledgers, records indicating, summarizing, or evidencing Borrower's
properties or assets (including the Collateral) or liabilities; all information
relating to Borrower's business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs, or other computer
prepared information.
"Borrowing Base" has the meaning set forth in Section 2.1(a).
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which national banks are authorized or required to close
"Change of Control" shall be deemed to have occurred at such time
as a "person" or "group" other than Parent (within the meaning of Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
Of 1934), directly or indirectly, of more than ten percent (10%) of the total
voting power of all classes of stock then outstanding of Borrower entitled to
vote in the election of directors; provided, however, a "Change of Control"
shall not occur solely as a result of the Subordinated Lender's conversion, in
accordance with the documents evidencing the Subordinated Debt as of the Closing
Date, of the Subordinated Debt into equity of Borrower comprising up to thirty
percent (30%) of the total voting power of all classes of stock then outstanding
of Borrower entitled to vote in the election of directors.
"Closing Date" means the date of the first to occur of the making
of the initial Advance or the issuance of the initial Letter of Credit.
"Code" means the Uniform Commercial Code, as in effect in the
State of Georgia.
"Collateral" means all property of Borrower, including each of
the following:
(A) the Accounts;
2.
<PAGE>
(B) Borrower's Books;
(C) the Equipment;
(D) the General Intangibles;
(E) the Inventory;
(F) the Investment Property;
(G) the Negotiable Collateral;
(H) any money, or other assets of Borrower that now of hereafter come
into the possession, custody, or control of Foothill; and
(I) the proceeds and products, whether tangible or intangible, of any
of the foregoing, including proceeds of insurance covering any or all of the
Collateral, and any and all Accounts, Borrower's Books, Equipment, General
Intangibles, Inventory, Investment Property, Negotiable Collateral, Real
Property, money, deposit accounts, or other tangible or intangible property
resulting from the sale, exchange, collection, or other disposition of any of
the foregoing, or any portion thereof or interest therein, and die proceeds
thereof.
"Collateral Access Agreement" means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgement agreement of any warehouseman,
processor, lessor, consignee, or other Person in possession of, having a Lien
upon, or having rights or interests in the Equipment or Inventory, in each case,
in form and substance satisfactory to Foothill.
"Collections" means all cash, checks, notes, instruments, and other
items of payment (including, insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds).
"Daily Balance" means the amount of an Obligation owed at the end
of a given day.
"deems itself insecure" means that the Person deems itself insecure in
accordance with the provisions of Section 11-1-208 of the Code.
"Default" means an event, condition, or default that, with the giving
of notice, the passage of time, or both, would be an Event of Default.
"Designated Account" means account number 750164727 of Borrower
maintained with Borrower's Designated Account Bank, or such other deposit
account of Borrower (located within the United States) which has been
designated, in writing and from time to time, by Borrower to Foothill.
"Designated Account Bank" means Marine Midland Bank, whose office is
located in Buffalo, New York, and whose ABA number is 021001088.
3.
<PAGE>
"Dilution" means, in each case based upon the experience of the
immediately prior three (3) months, the result of dividing the Dollar amount of
(a) bad debt write-downs, discounts, advertising, returns, promotions, credits,
or other dilution with respect to the Accounts, by (b) Borrower's Collections
(excluding extraordinary items) plus the Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of determination, an amount
sufficient to reduce Foothill's advance rate against Eligible Accounts by one
percentage point for each percentage point by which Dilution is in excess of
five percent (5.00%).
"Disbursement Letter" means an instructional letter executed and
delivered by Borrower to Foothill regarding the extensions of credit to be made
on the Closing Date, the form and substance of which shall be satisfactory to
Foothill.
"Dollars or $" means United States dollars.
"Early Termination Premium" has the meaning set forth in Section 3.6.
"EBITDA" means, with respect to Borrower as of the end of any fiscal
year, the Net Income for such fiscal year, plus, without duplication and to the
extent deducted in determining Net Income for such period, the sum of (a) income
taxes, (b) interest expense for such period determined in accordance with GAAP
and (c) depreciation and amortization expense.
"Eligible Accounts" means those Accounts created by Borrower in the
ordinary course of business (net of finance charges), that arise out of
Borrower's sale of goods and rendition of services, that strictly comply with
each and all of the representations and warranties respecting Accounts made by
Borrower to Foothill in the Loan documents, and that are and at all times
continue to be acceptable to Foothill in all respects; provided, however, that
standards of eligibility may be fixed and revised from time to time by Foothill
in Foothill's reasonable credit judgment. Eligible Accounts shall not include
the following:
(a) Accounts (i) that the Account Debtor has failed to pay within (x)
thirty (30) days of the due date with respect to Graybar Electric Co., Inc., or
(y) sixty (60) days of the due date with respect to all other Account Debtors'
or (ii) with selling terms of more than sixty (60) days;
(b) Accounts owed by an Account Debtor or its Affiliates where fifty
percent (50%) or more of all Accounts owed by that Account Debtor (or its
Affiliates) are deemed ineligible under clause (a) above;
(c) Accounts with respect to which the Account Debtor is an employee,
Affiliate or agent of Borrower;
(d) Accounts with respect to which goods are samples or are placed on
consignment, guaranteed sale, sale or return, sale an approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
4.
<PAGE>
(e) Accounts that are not payable in Dollars or with respect to which
the Account Debtor (i) does not maintain its chief executive office in the
United States, or (ii) is not organized under the laws of the United States or
any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof, unless (y) the Account is supported by an irrevocable
letter of credit satisfactory to Foothill (as to form, substance, and issuer or
domestic confirming bank) that has been delivered to Foothill and is directly
drawable by Foothill, or (z) the account is covered by credit insurance in form
and amount, and by an insurer, satisfactory to Foothill;
(f) Accounts with respect to which the Account Debtor is either (i)
the United States or any department, agency, or instrumentality of the United
States (exclusive, however, of Accounts with respect to which Borrower has
complied, to the satisfaction of Foothill, with the Assignment of Claims Act, 31
U.S.C. (S) 3727), or (ii) any State of the United States (exclusive, however, of
Accounts owed by any State that does not have a statutory counterpart to the
Assignment of Claims Act), to the extent such accounts described in (i) and (ii)
above exceed, in the aggregate, $250,000;
(g) Accounts with respect to which the Account Debtor is a creditor of
Borrower, has or has asserted a right of setoff, has disputed its liability,
cancelled its contract with Borrower, or has made any claim with respect to the
Account (to the extent of such claim);
(h) Accounts, to the extent such Accounts, together with all other
Accounts owing by such Account Debtor to Borrower, exceed in the aggregate (i)
fifty percent (50%) of all Eligible Accounts in the case of Graybar Electric
Co., Inc., (ii) twenty percent (20%) of all Eligible Accounts in the case of
Interdigital Communication Corp. and Tele-Automation, (iii) fifteen percent
(15%) of all Eligible Accounts in the case of Circuit City Stores, Inc., AmStar
Communications, Alltel Supply, North Supply Co., Power & Telephone Supply
Company, and Rauland-Borg Corp., and (iv) ten percent (10%) of all Eligible
Accounts in all other cases;
(i) Accounts with respect to which the Account Debtor is subject to
any Insolvency Proceeding, or becomes insolvent, or goes out of business;
(j) Accounts the collection of which Foothill, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Accounts with respect to which the goods giving rise to such
Account have not been shipped and billed to the Account Debtor, the services
giving rise to such Account have not been performed and accepted by the Account
Debtor, or the Account otherwise does not represent a final sale;
(l) Accounts with respect to which the Account Debtor is located in
the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana,
5.
<PAGE>
West Virginia, or such other states, or has filed a Notice of Business
Activities Report with the applicable division of taxation, the department of
revenue, or with such other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement; and
(m) Accounts that represent progress payment, deposits or other
advance billings that are due prior to the completion of performance by Borrower
of the subject contract for goods or services.
"Eligible In-Transit Inventory" means those items of Inventory that do
not qualify as Eligible Landed Inventory solely because they are not in a
location set forth on Schedule E-1 but: (a) such Inventory is currently in-
transit from a location not set forth on Schedule E-1 to a location set forth on
Schedule E-1, (b) title to such Inventory has passed to Borrower, (c) documents
of title with respect to such Inventory have been delivered to Foothill or its
agent; (d) such Inventory is insured against types of loss, damage, hazards, and
risks, and in amounts, satisfactory to Foothill in its discretion, and (e) such
Inventory has been paid for or, if purchased under an Inventory Letter of
Credit, such Inventory Letter of Credit either has been drawn upon in full and
reimbursed, or expired undrawn; in each case, with documentation therefor in
form and substance satisfactory to Foothill in its discretion.
"Eligible Inventory" means the Eligible In-Transit Inventory and
the Eligible Landed Inventory.
"Eligible Landed Inventory" means Inventory consisting of first
quality finished goods held for sale in the ordinary course of Borrower's
business that are located at or in-transit between Borrower's premises
identified on Schedule E-1, that strictly comply with each and all of the
representations and warranties respecting Inventory made by Borrower to Foothill
in the Loan Documents, and that are and at all times continue to be acceptable
to Foothill in all respects; provided, however, that standards of eligibility
may be fixed and revised from time to time by Foothill in Foothill's reasonable
credit judgment. In determining the amount to be so included, Inventory shall be
valued at the lower of cost or market on a basis consistent with GAAP and
Borrower's current and historical accounting practices. An item of Inventory
shall not be included in Eligible Landed Inventory if:
(a) it is not owned solely by Borrower and Borrower does not have
good, valid, and marketable title thereto;
(b) it is not located at, or in-transit between, one of the locations
set forth on Schedule E-1;
(c) it is not located on property owned or leased by Borrower or in a
contract warehouse, in each case, subject to a Collateral Access Agreement
executed by the mortgagee, lessor, the warehouseman, or other third party, as
the case may be, and segregated or otherwise separately identifiable from goods
of others, if any, stored on the premises;
(d) it is located at any retail store or at Borrower's premises in
Kennesaw, Georgia, or it is in the possession or control of King Technology;
6.
<PAGE>
(e) it is not subject to a valid and perfected first priority security
interest in favor of Foothill;
(f) it does not meet all of Borrower's quality standards or any other
standards imposed by any Person having regulatory authority over such goods;
(g) it consists of goods rejected by Borrower's customers; and
(i) it is obsolete, a restrictive or custom item, work-in-process, a
component that is not part of finished goods, or constitutes spare parts,
packaging and shipping materials, supplies used or consumed in Borrower's
business, Inventory subject to a Lien in favor of any third Person, bill and
hold goods, defective goods, sample Inventory, "seconds," or Inventory acquired
on consignment.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, machine tools, motors, equipment, furniture, furnishings, fixtures,
tools, parts, goods (other than consumer goods, farm products, or Inventory),
wherever located, including, (a) any interest of Borrower in any of the
foregoing, and (b) all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, 29
U.S.C. (S)(S) 1000 et seq., amendments thereto, successor statutes, and
regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject to ERISA whose
employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the employees of Borrower
under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with respect to any Benefit
Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its
Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which
it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c)
the providing of notice of intent to terminate a Benefit Plan in a distress
termination (as described in Section 4041(c) of ERISA), (d) the institution by
the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e)
any event or condition (i) that provides a basis under Section 4042(a)(1), (2),
or (3) of ERISA for the termination of, or the appointment of a trustee to
administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the
partial or complete withdrawal within the meaning of Sections 4203 and 4205 of
ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a
Multiemployer Plan, or (g) providing any security to any Plan under Section
401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA
Affiliates.
7.
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"Event of Default" has the meaning set forth in Section 8.
"Existing Lender" means Marine Midland Business Loans, Inc.
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble to this
Agreement.
"Foothill Account" has the meaning set forth in Section 2.5.
"Foothill Expenses" means all: reasonable costs or expenses
(including taxes, and insurance premiums) required to be paid by Borrower under
any of the Loan Documents that are paid or incurred by Foothill; reasonable fees
or charges paid or incurred by Foothill in connection with Foothill's
transactions with Borrower, including, fees or charges for photocopying,
notarization, couriers and messengers, telecommunication, public record searches
(including tax lien, litigation, and UCC searches and including searches with
the patent and trademark office, the copyright office, or the department of
motor vehicles), filing, recording, publication, appraisal (including periodic
Collateral appraisals), costs and expenses incurred by Foothill in the
disbursement of funds to Borrower (by wire transfer or otherwise); reasonable
charges paid or incurred by Foothill resulting from the dishonor of checks;
costs and expenses paid or incurred by Foothill to correct any default or
enforce any provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral or any portion thereof, irrespective
of whether a sale is consummated; costs and expenses paid or incurred by
Foothill in examining Borrower's Books; costs and expenses of third party claims
or any other suit paid or incurred by Foothill in enforcing or defending the
Loan Documents or in connection with the transactions contemplated by the Loan
Documents or Foothill's relationship with Borrower or any guarantor; and
Foothill's reasonable attorneys fees and expenses incurred in advising,
structuring, drafting, reviewing, administering, amending, terminating,
enforcing (including attorneys fees and expenses incurred in connection with a
"workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or
any guarantor of the Obligations), defending, or concerning the Loan Documents,
irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles as in effect
from time to time in the United States, consistently applied.
"General Intangibles" means all of Borrower's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes, or regulations, choses or things in
action, goodwill, patents, trade names, trademarks, servicemarks, copyright,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, rights to payment and other rights under any
royalty, distribution or licensing agreements, infringement claims, computer
programs, information contained on computer disks or tapes, literature, reports,
catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax
refund claims), other than goods, Accounts, and Negotiable Collateral.
"Governing Documents" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.
8.
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"Hazardous Materials" means (a) substances that are defined or listed
in, or otherwise classified pursuant to, any applicable laws or regulations as
"Hazardous substances," "hazardous materials," "hazardous wastes," "toxic
substances," or any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any radioactive materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.
"Indebtedness" means: (a) all obligations of Borrower for borrowed
money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or
other similar instruments and all reimbursement or other obligations of Borrower
in respect of letters of credit, bankers acceptances, interest rate swaps, or
other financial products, (c) all obligations of Borrower under capital leases,
(d) all obligations or liabilities of others secured by a Lien on any property
or asset of Borrower, irrespective of whether such obligation or liability is
assumed, and (e) any obligation of Borrower guaranteeing or intended to
guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with
recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or
other obligation of any other Person.
"Insolvency Proceeding" means any proceeding commenced by or against
any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"Inventory" means all present and future inventory in which Borrower
has any interest, including goods held for sale or lease or to be furnished
under a contract of service and all of Borrower's present and future raw
materials, work in process, finished goods, and packing and shipping materials,
wherever located.
"Inventory Letter of Credit" means a documentary Letter of Credit
issued to support the purchase by Borrower of Inventory prior to transit to a
location set forth on Schedule E-1, that provides that all draws thereunder must
require presentation of customary documentation (including, if applicable,
commercial invoices, packing list, certificate of origin, bill of lading or
airwaybill, customs clearance documents, quota statement, inspection
certificate, beneficiaries statement, and bill of exchange, bills of lading,
dock warrants, dock receipts, warehouse receipts, or other documents of title)
in form and substance satisfactory to Foothill and reflecting the passage to
Borrower of title to first quality Inventory conforming to Borrower's contract
with the seller thereof. Any such Letter of Credit shall cease to be an
"Inventory Letter of Credit" at such time, if any, as the goods purchased
thereunder become Eligible Landed Inventory.
"Inventory Reserves" means reserves (determined from time to time by
Foothill in its reasonable credit judgment) for (a) the estimated costs relating
to unpaid freight
9.
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charges, warehousing or storage charges, taxes, duties, and other similar unpaid
costs associated with the acquisition of Eligible In-Transit Inventory by
Borrower, plus (b) the estimated reclamation claims of unpaid sellers of
Inventory sold to Borrower.
"Investment Property" means all "investment property", as such term is
defined in the Code, now owned or hereafter acquired by Borrower and, in any
event, including, without limitation, all securities, whether certificated or
uncertificated, security entitlements, securities accounts, commodity contracts
and commodity accounts.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section 2.2(a).
"Letter of Credit" means an L/C or an L/C Guaranty, as the context
requires.
"Lien" means any interest in property security an obligation owed to,
or a claim by, any Person other than the owner of the property, whether such
interest shall be based on the common law, statute, or contract, whether such
interest shall be recorded or perfected, and whether such interest shall be
contingent upon the occurrence of some future event or events or the existence
of some future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, adverse
claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes, and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"Loan Account" has the meaning set forth in Section 2.8.
"Loan Documents" mean this Agreement, the Disbursement Letter, the
Letters of Credit, the Lockbox Agreements, the Trademark Security Agreement, the
Patent Security Agreement, the Subordination Agreement, the Collateral Access
Agreements, any assignment of insurance policies, any note or notes executed by
Borrower and payable to Foothill, and any other agreement entered into, now or
in the future, in connection with this Agreement.
"Lockbox Account" shall mean a depositary account established pursuant
to one of the Lockbox Agreements.
"Lockbox Agreements" means those certain Lockbox Operating Procedural
Agreements and those certain Blocked Depository Account Agreements, in form and
substance satisfactory to Foothill, each of which is among Borrower, Foothill,
and one of the Lockbox Banks.
10.
<PAGE>
"Lockbox Banks" means Marine Midland Bank, First Tennessee Bank
National Association, and/or such other Person or Persons as Foothill and
Borrower may designate from time to time.
"Lockboxes" has the meaning set forth in Section 2.5.
"Material Adverse Change" means (a) a material adverse change in the
business, prospects, operations, results of operations, assets, liabilities or
condition (financial or otherwise) of Borrower, (b) the material impairment of
Borrower's ability to perform its obligations under the Loan Documents to which
it is a party or of Foothill to enforce the Obligations or realize upon the
Collateral, (c) a material adverse effect on the value of the Collateral or the
amount that Foothill would be likely to receive (after giving consideration to
delays in payment and costs of enforcement) in the liquidation of such
Collateral, or (d) a material impairment of the priority or enforceability of
Foothill's Liens with respect to the Collateral.
"Margin" has the meaning set forth in Section 2.4(a).
"Maturity Date" has the meaning set forth in Section 3.4.
"Maximum Account" means $7,500,000.
"Multiemployer Plan" means a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any
ERISA Affiliate has contributed, or was obligated to contribute, within the past
six years.
"Net Income" means, with respect to Borrower as of the end of any
fiscal year, the net income (or deficit) of Borrower for such fiscal year,
determined in accordance with GAAP.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit, notes, drafts, instruments, investment property, security
entitlements, securities (including the shares of stock of Subsidiaries, if any,
of Borrower), documents, personal property leases (wherein Borrower is the
lessor), chattel paper, and Borrower's Books relating to any of the foregoing.
"Obligations" means all loans, Advances, debts, principal, interest
(including any interest that, but for the provisions of the Bankruptcy Code,
would have accrued), contingent reimbursement obligations under any outstanding
Letters of Credit, premiums (including Early Termination Premiums), liabilities
(including all amounts charged to Borrower's Loan Account pursuant hereto),
obligations, fees, charges, costs, or Foothill Expenses (including any fees or
expenses that, but for the provisions of the Bankruptcy Code, would have
accrued), lease payments, guaranties, covenants, and duties owing by Borrower to
Foothill of any kind and description (whether pursuant to or evidenced by the
Loan Documents or pursuant to any other agreement between Foothill and Borrower,
and irrespective of whether for the payment of money), whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including any debt, liability, or obligation owing from
Borrower to others that Foothill may have obtained by assignment or otherwise,
and further
11.
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including all interest not paid when due and all Foothill Expenses that Borrower
is required to pay or reimburse by the Loan Documents, by law, or otherwise.
"Other Taxes" has the meaning set forth in Section 2.10.
"Overadvance" has the meaning set forth in Section 2.3.
"Parent" means Cortelco Systems Holding Corporation, a Delaware
corporation.
"Patent Security Agreement" means that certain Patent Security
Agreement of even date herewith among Borrower and Foothill, in form and
substance reasonably satisfactory to Foothill.
"Pay-Off Letter" means a letter, in form and substance reasonably
satisfactory to Foothill, from Existing Lender respecting the amount necessary
to repay in full all of the obligations of Borrower owing to Existing Lender and
obtain a termination or release of all of the Liens existing in favor of
Existing Lender in and to the properties or assets of Borrower.
"PBGC" means the Pension Benefit Guaranty Corporation as defined in
Title IV of ERISA, or any successor thereto.
"Permitted Liens" means (a) Liens held by Foothill, (b) Liens for
unpaid taxes that either (i) are not yet due and payable or (ii) are the subject
of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interest of
lessors under operating leases and purchase money Liens of lessors under capital
leases to the extent that the acquisition or lease of the underlying asset is
permitted hereunder and so long as the Lien only attaches to the asset purchased
or acquired and only secures the purchase price of the asset, (e) Liens arising
by operation of law in favor of warehousemen, landlords, carriers, mechanics,
materialmen, laborers, or suppliers, incurred in the ordinary course of business
of Borrower and not in connection with the borrowing of money, which Liens
either (i) are for sums not yet due and payable, or (ii) are the subject of
Permitted Protests, (f) Liens arising from deposits made in connection with
obtaining worker's compensation or other unemployment insurance, (g) Liens or
deposits to secure performance of bids, tenders, or leases (to the extent
permitted under this Agreement), incurred in the ordinary course of business of
Borrower and not in connection with the borrowing of money, (h) Liens arising by
reason of security for surety or appeal bonds in the ordinary course of business
of Borrower, (i) Liens of or resulting from any judgment or award that would not
have a Material Adverse Change and as to which the time for the appeal or
petition for rehearing of which has not yet expired, or in respect of which
Borrower is in good faith prosecuting an appeal or proceeding for a review, and
in respect of which a stay of execution pending such appeal or proceeding for
review has been secured, and (j) with respect to any Real Property, easements,
rights of way, zoning and similar covenants and restrictions, and similar
encumbrances that customarily exist on properties of Persons engaged in similar
activities and similarly situated and that in any event do not materially
interfere with or impair the use or operation of the Collateral by Borrower or
the value of Foothill's Lien thereon or therein, or materially interfere with
the ordinary conduct of the business of Borrower.
12.
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"Permitted Protest" means the right of Borrower to protest any Lien
other than any such Lien that secures the Obligations, tax (other than payroll
taxes or taxes that are the subject of a United States federal tax lien), or
rental payment, provided that (a) a reserve with respect to such obligation is
established on the books of Borrower in an amount that is reasonably
satisfactory to Foothill, (b) any such protest is instituted and diligently
prosecuted by Borrower in good faith, and (c) Foothill is satisfied that, while
any such protest is pending, there will be no impairment of the enforceability,
validity, or priority of any of the Liens of Foothill in and to the Collateral.
"Person" means and includes natural persons, corporations, limited
liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"Plan" means any employee benefit plan, program or arrangement
maintained or contributed to by Borrower or with respect to which it may incur
liability.
"Projections" means those projections attached hereto as Exhibit P-1
for the fiscal year ending 7/31/88 and such other subsequent projects of
Borrower's financial statements as Foothill may request from time to time, for
such periods and in such form and substance as may be mutually agreed upon by
Borrower and Foothill.
"Real Property" means any estates or interests in real property now
owned or hereafter acquired by Borrower.
"Reference Rate" means the variable rate of interest, per annum, most
recently announced by Norwest Bank Minnesota, National Association, or any
successor thereto, as its "base rate," irrespective of whether such announced
rate is the best rate available from such financial institution.
"Reportable Event" means any of the events described in Section
4043(c) of ERISA or the regulations thereunder other than a Reportable Event as
to which the provision of thirty (30) days notice to the PBGC is waived under
applicable regulations.
"Retiree Health Plan" means an "employee welfare benefit plan" within
the meaning of Section 3(1) of ERISA that provides benefits to individuals after
termination of their employment, other than as required by Section 601 of ERISA.
"Solvent" means, with respect to any Person on a particular date, that
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's
13.
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properties and assets would constitute unreasonably small capital after giving
due consideration to the prevailing practices in the industry in which such
Person is engaged. In computing the amount of contingent liabilities at any
time, it is intended that such liabilities will be computed at the amount that,
in light of all the facts and circumstances existing at such time, represents
the amount that reasonably can be expected to become an actual or matured
liability.
"Subordination Agreement" means that certain Subordination
Agreement entered into on or after the Closing Date between Borrower, Foothill
and the Subordinated Lender, in form and substance reasonably satisfactory to
Foothill and as amended with the consent of Foothill.
"Subordinated Debt" means that Indebtedness owed by Borrower to
the Subordinated Lender, which Indebtedness does not exceed in the aggregate
$3,000,000, plus accrued interest, and which is at all times subordinated to the
Obligations pursuant to the Subordination Agreement.
"Subordinated Lender" means, collectively, ChinaVest IV, L.P., a
Delaware limited partnership, ChinaVest IV-A, L.P., a Delaware limited
partnership and ChinaVest IV-B, L.P., a Bermuda limited partnership.
"Subsidiary" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person directly or
indirectly owns or controls the shares of stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors (or
appoint other comparable managers) of such corporation, partnership, limited
liability company, or other entity.
"Taxes" has the meaning set forth in Section 2.10.
"Trademark Security Agreement" means that certain Trademark
Security Agreement of even date herewith among Borrower and Foothill, in form
and substance reasonably satisfactory to Foothill.
"Voidable Transfer" has the meaning set for in Section 15.8.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP. When used herein, the term
"financial statements" shall include the notes and schedules thereto. Whenever
the term "Borrower" is used in respect of a financial covenant or a related
definition, it shall be understood to mean Borrower on a consolidated basis
unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in the
Code shall be construed and defined as set forth in the Code unless otherwise
defined herein.
1.4 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as
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a whole and not to any particular provision of this Agreement. An Event of
Default shall "exist", "continue" or be "continuing" until such Event of Default
has been waived in writing by Foothill. Section, subsection, clause, schedule,
and exhibit references are to this Agreement unless otherwise specified. Any
reference in this Agreement or in the Loan Documents to this Agreement or any of
the Loan Documents shall include all alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, and
supplements, thereto and thereof, as applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(A) Subject to the terms and conditions of this Agreement,
Foothill agrees to make advances ("Advances") to Borrower in an amount
outstanding not to exceed at any one time the lesser of (i) the Maximum Amount
less the outstanding balance of all undrawn or unreimbursed Letters of Credit,
or (ii) the Borrowing Base less (A) the aggregate amount of all undrawn or
unreimbursed Letters of Credit (other than Inventory Letters of Credit), less
(B) seventy percent (70%) of the aggregate amount of all undrawn or unreimbursed
Inventory Letters of Credit, less (C) the aggregate amount of the Inventory
Reserves. For purposes of this Agreement, "Borrowing Base", as of any date of
termination, shall mean the result of:
(x) the lesser of (i) eighty-five percent (85%) of Eligible
Accounts, less the amount, if any, of the Dilution Reserve, and (ii)
an amount equal to Borrower's Collections with respect to Accounts for
the immediately preceding seventy-five (75) day period, plus
(y) the lowest of (i) $3,750,000, (ii) thirty percent (30%)
of the value of Eligible Inventory, and (iii) eighty percent (80%) of
the amount of credit availability created by clause (x) above, minus
(z) the aggregate amount of reserves, if any, established by
Foothill under Section 2.1(b).
(B) Anything to the contrary in Section 2.1(a) above
notwithstanding, Foothill may create reserves against the Borrowing Base or
reduce its advance rates based upon Eligible Accounts or Eligible Inventory
without declaring an Event of Default if it determines, in its reasonable
discretion, that any of the circumstances described in clauses (b), (c) or (d)
of the definition of "Material Adverse Change" have occurred. Additionally,
Borrower acknowledges that the advance rate against Eligible Inventory set forth
in clause (y)(ii) above is based on the appraisal of Eligible Inventory
performed by Koll-Dove Tech Global Valuation prior to the Closing Date and
agrees that Foothill may adjust the advance rate against Eligible Inventory set
forth in clause (y)(ii) above based on the results of subsequent quarterly
appraisals of the Eligible Inventory.
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(C) Foothill shall have no obligation to make Advances hereunder
to the extent they would cause the outstanding Obligations to exceed the Maximum
Amount.
(D) Amounts borrowed pursuant to this Section 2.1 may be repaid
and, subject to the terms and conditions of this Agreement, reborrowed at any
time during the term of this Agreement.
2.2 LETTERS OF CREDIT.
(A) Subject to the terms and conditions of this Agreement,
Foothill agrees to issue letters of credit for the account of Borrower (each, an
"L/C") or to issue guarantees of payment (each such guaranty, an "L/C Guaranty")
with respect to letters of credit issued by an issuing bank for the account of
Borrower. Foothill shall have no obligation to issue a Letter of Credit if any
of the following would result:
(1) the sum of seventy percent (70%) of the aggregate amount
of all undrawn and unreimbursed Inventory Letters of Credit, plus one hundred
percent (100%) of the aggregate amount of all other types of undrawn and
unreimbursed Letters of Credit, would exceed the Borrowing Base less the amount
of outstanding Advances less the aggregate amount of Inventory Reserves and
reserves established under Section 2.1(b); or
(2) the aggregate amount of all undrawn or unreimbursed
Letters of Credit (including Inventory Letters of Credit) would exceed the lower
of: (x) the Maximum Amount less the amount of outstanding Advances less the
aggregate amount of Inventory Reserves and reserves established under Section
2.1(b); or (y) $500,000; or
(3) the outstanding Obligations would exceed the Maximum
Amount.
Borrower expressly understands and agrees that Foothill shall have no obligation
to arrange for the issuance by issuing banks of the letters of credit that are
to be the subject of L/C Guarantees. Borrower and Foothill acknowledge and
agree that certain of the letters of credit that are to be the subject of L/C
Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall
have a expiry date no later than twenty (20) days prior to the date on which
this Agreement is scheduled to terminate under Section 3.4 and all such Letters
of Credit shall be in form and substance acceptable to Foothill in its sole
discretion. If Foothill is obligated to advance funds under a Letter of Credit,
Borrower immediately shall reimburse such amount to Foothill and, in the absence
of such reimbursement, the amount so advanced immediately and automatically
shall be deemed to be an Advance hereunder and, thereafter, shall bear interest
at the rate then applicable to Advances under Section 2.4.
(B) Borrower hereby agrees to indemnify, save, defend, and hold
Foothill harmless from any loss, cost, expense, or liability, including payments
made by Foothill, expenses, and reasonable attorneys fees incurred by Foothill
arising out of or in connection with any Letter of Credit. Borrower agrees to be
bound by the issuing bank's regulations and interpretations of any Letters of
Credit guarantied by Foothill and opened to or for Borrower's account or by
Foothill's interpretations of any L/C issued by Foothill to or for Borrower's
account, even though this interpretation may be different from Borrower's own,
and Borrower
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understands and agrees that Foothill shall not be liable for any error,
negligence, or mistake, whether of omission or commission, in following
Borrower's instruction or those contained in the Letter of Credit or any
modifications, amendments, or supplements thereto. Borrower understands that the
L/C Guarantees may require Foothill to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify, save, defend, and hold Foothill
harmless with respect to any loss, cost, expense (including reasonable attorneys
fees), or liability incurred by Foothill under any L/C Guaranty as a result of
Foothill's indemnification of any such issuing bank. Notwithstanding the
foregoing, Borrower shall not be required to indemnify Foothill for any loss,
cost or expense that is the result of the gross negligence or willful misconduct
of Foothill, as determined by a final order of a court of competent
jurisdiction.
(C) Borrower hereby authorizes and directs any bank that issues a
letter of credit guaranteed by Foothill to deliver to Foothill all instruments,
documents, and other writings and property received by the issuing bank pursuant
to such letter of credit, and to accept and rely upon Foothill's instructions
and agreements with respect to all matters arising in connection with such
letter of credit and the related application. Borrower may or may not be the
"applicant" or "account party" with respect to such letter of credit.
(D) Any and all charges, fees, and costs actually incurred by
Foothill, relating to the letters of credit guaranteed by Foothill shall be
considered Foothill Expenses for purposes of this Agreement and immediately
shall be reimbursable by Borrower to Foothill.
(E) Immediately upon the termination of this Agreement, Borrower
agrees to either (i) provide cash collateral to be held by Foothill in an amount
equal to 102% of the maximum amount of Foothill's obligations under Letters of
Credit, or (ii) cause to be delivered to Foothill releases of all of Foothill's
obligations under standing Letters of Credit. At Foothill's discretion, any
proceeds of Collateral received by Foothill after the occurrence and during the
continuation of an Event of Default may be held as the cash collateral required
by this Section 2.2(e).
(F) If by reason of (i) any change in any applicable law, treaty,
rule, or regulation or any change in the interpretation or application by any
governmental authority of any such applicable law, treaty, rule, or regulation,
or (ii) compliance by the issuing bank or Foothill with any direction, request,
or requirement (irrespective of whether having the force of law) of any
governmental authority or monetary authority including, without limitation,
Regulation D of the Board of Governors of the Federal Reserve System as from
time to time in effect (and any successor thereto):
(A) any reserve, deposit, or similar requirement is or shall be
imposed or modified in respect of any Letters of Credit issued hereunder, or
(B) there shall be imposed on the issuing bank or Foothill any
other condition regarding any letter of credit, or Letter of Credit, as
applicable, issued pursuant hereto;
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and the result of the foregoing is to increase, directly or indirectly, the cost
to the issuing bank or Foothill of issuing, making, guaranteeing, or maintaining
any letter of credit, or Letter of Credit, as applicable, or to reduce the
amount receivable in respect thereof by such issuing bank or Foothill, then, and
in any such case, Foothill, may, at any time within a reasonable period after
the additional cost is incurred or the amount received is reduced, notify
Borrower, and Borrower shall pay on demand such amounts as the issuing bank or
Foothill may specify to be necessary to compensate the issuing bank or Foothill
for such additional cost or reduced receipt, together with interest on such
amount from the date of such demand until payment in full thereof at the rate
set forth in Section 2.4(a) or (c)(1), as applicable. The determination by the
issuing bank or Foothill, as the case may be, of any amount due pursuant to this
Section 2.2(f), as set forth in a certificate setting forth the calculation
thereof in reasonable detail, shall, in the absence of manifest or demonstrable
error, be final and conclusive and binding on all of the parties hereto.
2.3 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and 2.2 is
greater than either the Dollar or percentage limitations set forth Sections 2.1
and 2.2 (an "Overadvance"), Borrower immediately shall pay to Foothill, in cash,
the amount of such excess to be used by Foothill first, to repay Advances
outstanding under Section 2.1 and, thereafter, to be held by Foothill as cash
collateral to secure Borrower's obligation to repay Foothill for all amounts
paid pursuant to Letters of Credit.
2.4 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS, AND
CALCULATIONS; PROMISE TO PAY.
(A) INTEREST RATE. Except as provided in clause (c) below, all
Obligations (except for undrawn Letters of Credit) shall bear interest at a per
annum rate equal to the Reference Rate plus the Margin in effect from time to
time. As of the Closing Date and through and including September 15, 1998, the
Margin shall be the per annum rate of three-eighths of one percent (0.375%).
Except as provided in the last sentence of this Section 2.4(a), on September 16,
1998 and on September 16/th/ of each year thereafter, the Margin shall be-
adjusted to be the interest rate margin based upon the EBITDA as of the most
recent fiscal year end, as reflected in Borrower's financial statements required
to be delivered pursuant to Section 6.3(a)(ii) (with such EBITDA to be verified
upon Foothill's receipt of the audited financial statements required to be
delivered pursuant to Section 6.3 (a)(iii) and adjusted retroactively if such
EBITDA pursuant to such audited financial statements differs from the EBITDA
reported to Foothill in the financial statements delivered pursuant to Section
6.3(a)(ii)), expressed as a per annum rate of interest as follows:
EBITDA Margin
------ ------
Less than or equal to $1,200,000 three-eighths of one percent
(0.375%)
Greater than $1,200,000 but one-quarter of one percent
Less than or equal to $1,700,000 (0.250%)
Greater than $1,700,000 but one-eighth of one percent
Less than or equal to $2,200,000 (0.125%)
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Greater than $2,200,000 zero (0.000%)
In the event that Borrower fails to timely provide the financial statements
referred to above in accordance with the terms of Section 6.3(a)(ii) thereof,
and without prejudice to any additional rights under Section 9.1 hereof, the
Margin shall be three-eighths of one percent (0.375%) until two Business Days
after the actual delivery of such statements. Notwithstanding the above,
however, the Margin shall not be adjusted on September 16/th/ of any year if
Cortelco International, Inc.'s EBITDA was less than $1,500,000 as of the fiscal
year of Cortelco International, Inc. most recently ended, and, in such event,
the Margin shall be three-eighths of one percent (.375%) until the following
September 16/th/.
(B) LETTER OF CREDIT FEE. Except as provided in clause (c) below,
Borrower shall pay Foothill a fee (in addition to the charges, commissions,
fees, and costs set forth in Section 2.2(d)) equal to one and one-half
percentage points (1.50%) per annum times the aggregate undrawn amount of all
outstanding Letters of Credit.
(C) DEFAULT RATE. Upon the occurrence and during the continuation of
an Event of Default, (i) all Obligations (except for undrawn Letters of Credit)
shall bear interest at a per annum rate equal to the Reference Rate plus the
Margin then in effect plus two percentage points (2.00%), and (ii) the Letter of
Credit fee provided in Section 2.4(b) shall be increased to three and one-half
percentage points (3.50%) per annum times the amount of the undrawn Letters of
Credit that were outstanding during the immediately preceding month.
(D) MINIMUM INTEREST AND FEES. Notwithstanding anything to the
contrary set forth in clauses (a) through (c) above, in no event shall the rate
of interest chargeable hereunder for any day be less than eight percent (8.00%)
per annum, and in no event shall the aggregate interest and Letter of Credit
fees chargeable pursuant to this Section 2.4 for any month be less than $15,000.
To the extent that interest accrued hereunder at the rate set forth herein would
be less than eight percent (8.00%) per annum, the interest rate chargeable
hereunder for such day automatically shall be deemed increased to such minimum
rate. To the extent that interest and Letter of Credit fees accrued hereunder at
the rates set forth herein (including the minimum interest rate) would yield
less than $15,000 per month, the rates chargeable hereunder for the period in
question automatically shall be deemed increased to such rates that would result
in the minimum amount of interest and Letter of Credit fees being accrued and
payable hereunder. Foothill shall be entitled to such minimum interest and
Letter of Credit fees even if there are no Advances or Letters of Credit
outstanding hereunder and, in such event, the amount of such minimum interest
and Letter of Credit fees shall be deemed to be an additional fee payable by
Borrower hereunder.
(E) PAYMENTS. Interest and Letter of Credit fees payable hereunder
shall be due and payable, in arrears, on the first day of each month during the
term hereof. Borrower hereby authorizes Foothill, at its option, without prior
notice to Borrower, to charge such interest and Letter of Credit fees, all
Foothill Expenses (as and when incurred), the charges, commissions, fees, and
costs provided for in Section 2.2(d) (as and when accrued incurred), the fees
and charges provided for in Section 2.9 (as and when accrued or incurred), and
all installments or other payments due under any Loan Document to Borrower's
Loan Account, which amounts thereafter shall accrue interest at the rate then
applicable to Advances hereunder.
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Any interest not paid when due shall be compounded and shall thereafter accrue
interest at the rate then applicable to Advances hereunder.
(F) COMPUTATION. The Reference Rate as of the date of this Agreement
is 8.50 % per annum. In the event the Reference Rate is changed from time to
time hereafter, the applicable rate of interest hereunder automatically and
immediately shall be increased or decreased by an amount equal to such change in
the Reference Rate. All interest and fees chargeable under the Loan Documents
shall be computed on the basis of a 360 day year for the actual number of days
elapsed.
(G) INTENT TO LIMIT CHARGES TO MAXIMUM LAWFUL RATE. In no event shall
the interest rate or rates payable under this Agreement, plus any other amounts
paid in connection herewith, exceed the highest rate permissible under any law
that a court of competent jurisdiction shall, in a final determination, deem
applicable. Borrower and Foothill, in executing and delivering this Agreement,
intend legally to agree upon the rate or rates of interest or manner of payment
stated within it; provided, however, that, anything contained herein to the
contrary notwithstanding, if said rate or rates of interest or manner of payment
exceeds the maximum allowable under applicable law, then, ipso facto as of the
date of this Agreement, Borrower is and shall be liable only for the payment of
such maximum as allowed by law, and payment received from Borrower in excess of
such legal maximum, whenever received, shall be applied to reduce the principal
balance of the Obligations to the extent of such excess.
(H) PROMISE TO PAY. Borrower hereby promises to pay to Foothill the
principal amount of all Advances, together with accrued interest, fees and other
amounts due thereon, all in accordance with the terms of this Agreement.
2.5 COLLECTION OF ACCOUNTS. Borrower shall at all times maintain lockboxes
(the "Lockboxes") and, immediately after the Closing Date, shall instruct all
Account Debtors with respect to the Accounts, General Intangibles, and
Negotiable Collateral of Borrower to remit all Collections in respect thereof
to such Lockboxes. Borrower, Foothill, and the Lockbox Banks shall enter into
the Lockbox Agreements, which among other things shall provide for the opening
of a Lockbox Account for the deposit of Collections at a Lockbox Bank. Borrower
agrees that all Collections and other amounts received by Borrower from any
Account Debtor or any other source immediately upon receipt shall be deposited
into a Lockbox Account. No Lockbox Agreement or arrangement contemplated thereby
shall be modified by Borrower without the prior written consent of Foothill.
Upon the terms and subject to the conditions set forth in the Lockbox
Agreements, all amounts received in each Lockbox Account shall be wired each
Business Day into an account (the "Foothill Account") maintained by Foothill at
a depositary selected by Foothill.
2.6 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of
any Collections by Foothill (whether from transfer to Foothill by the Lockbox
Banks pursuant to the Lockbox Agreements or otherwise) immediately shall be
applied provisionally to reduce the Obligations outstanding under Section 2.1,
but shall not be considered a payment on account unless such Collection item is
a wire transfer of immediately available federal funds and is made to the
Foothill Account or unless and until such Collection item is honored when
presented for payment. From and after the Closing Date, Foothill shall be
entitled to charge Borrower for one
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(1) Business Day of 'clearance' or 'float' at the rate set forth in Section
2.4(a) or Section 2.4(c)(i), as applicable, on all Collections that are received
by Foothill (regardless of whether forwarded by the Lockbox Bank to Foothill,
whether provisionally applied to reduce the Obligations under Section 2.1 or
otherwise). This across-the-board one (1) Business Day clearance or float charge
on all Collections is acknowledged by the parties to constitute an integral
aspect of the pricing of Foothill's financing of Borrower, and shall apply
irrespective of the characterization of whether receipts are owned by Borrower
or Foothill, and whether or not there are any outstanding Advances, the effect
of such clearance or float charge being the equivalent of charging one (1)
Business Day of interest on such Collections. Should any Collection item not be
honored when presented for payment, then Borrower shall be deemed not to have
made such payment, and interest shall be recalculated accordingly. Anything to
the contrary contained herein notwithstanding, any Collection item shall be
deemed received by Foothill only if it is received into the Foothill Account on
a Business Day on or before 2:00 p.m. Eastern time. If any Collection item is
received into the Foothill Account on a non-Business Day or after 2:00 p.m.
Eastern time on a Business Day, it shall be deemed to have been received by
Foothill as of the opening of business on the immediately following Business
Day.
2.7 DESIGNATED ACCOUNT. Foothill is authorized to make the Advances
and the Letters of Credit under this Agreement based upon telephonic or other
instructions received from anyone purporting to be an Authorized Person, or
without instructions if pursuant to Section 2.4(e). Borrower agrees to
establish and maintain the Designated Account with the Designated Account Bank
for the purpose of receiving the proceeds of the Advances requested by Borrower
and made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any Advance requested by Borrower and made by Foothill hereunder shall
be made to the Designated Account.
2.8 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Foothill
shall maintain an account on its books in the name of the Borrower (the "Loan
Account") on which Borrower will be charged with all Advances made by Foothill
to Borrower or for Borrower's account, including accrued interest, Foothill
Expenses, and any other payment Obligations of Borrower. In accordance with
Section 2.6, the Loan Account will be credited with all payments received by
Foothill from Borrower or for Borrower's account, including all amounts received
in the Foothill Account from any Lockbox Bank. Foothill shall render statements
regarding the Loan Account to Borrower, including principal, interest, fees, and
including an itemization of all charges and expenses constituting Foothill
Expenses owing, and such statements shall be conclusively presumed to be correct
and accurate and constitute an account stated between Borrower and Foothill
unless, within thirty (30) days after receipt thereof by Borrower, Borrower
shall deliver to Foothill written objection thereto describing the error or
errors contained in any such statements.
2.9 FEES. Borrower shall pay to Foothill the following fees:
(A) Closing Fee. On the Closing Date, a closing fee of $37,500
(B) Unused Line Fee. On the first day of each month during the
term of this Agreement, an unused line fee in an amount equal to three-eighths
of one percent (0.375%) per annum times the Average Unused Portion of the
Maximum Amount;
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(C) Annual Facility Fee. On each anniversary of the Closing Date,
an annual facility fee in an amount equal to one-eighth of one percent (0.125%)
of the Maximum Amount;
(D) Financial Examination, Documentation, and Appraisal Fees.
Foothill's customary fee of $650 per day per examiner, plus out-of-pocket
expenses for each financial analysis and examination (i.e., audits) of Borrower
performed by personnel employed by Foothill (provided, so long as no Event of
Default has occurred, Borrower shall not be required to pay more than $16,250 in
examiner fees, (specifically excluding out-of-pocket expenses) during any
calendar year); Foothill's customary appraisal fee of $1,500 per day per
appraiser, plus out-of-pocket expenses for each appraisal of the Collateral
performed by personnel employed by Foothill; and, the actual charges paid or
incurred by Foothill if it elects to employ the services of one or more third
Persons to perform such financial analyses and examinations (i.e., audits) of
Borrower or to appraise the Collateral; and, on each anniversary of the Closing
Date, Foothill's customary fee of $1,000 per year for its loan documentation
review; and Borrower acknowledges that Foothill, Koll-DoveTech Global Valuation,
Daley-Hodkin Corporation or any other Person selected by Foothill and reasonably
acceptable to Borrower, shall conduct appraisals, reviews and/or audits of the
Collateral not less than once every ninety (90) days (commencing ninety (90)
days from the date of the appraisal obtained by Foothill prior to the Closing
Date); provided, so long as no Event of Default has occurred, Borrower shall not
be required to pay more than $4,000 in fees for any such quarterly appraisal and
such appraisals shall not occur more than once each ninety day period; and
(E) Servicing Fee. On the first day of each month during the term of
this Agreement, and thereafter so long as any Obligations are outstanding, a
servicing fee in an amount equal to $1,500.
(F) Miscellaneous. The fees set forth above shall be fully earned
when due, non-refundable when paid and, if applicable, computed on the basis of
a 360 day year for the actual number of days elapsed.
2.10 TAX INDEMNITY. (a) All payments by Borrower under this Agreement or
under any other Loan Document shall be made free and clear of and without
deduction or withholding for any and all taxes, levies, imposts, deck charges or
withholding and all liabilities with respect thereto, excluding taxes paid or
payable by Foothill or required to be withheld from a payment to Foothill as a
result of Foothill having a present or former connection to the jurisdiction
imposing such tax (other than such connection arising solely from Foothill
having executed and delivered or performed its obligations or received a payment
under, this Agreement or any other Loan Document) (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and other liabilities being
referred to herein as "Taxes"), unless such Taxes are required by law or the
administration thereof to be withheld or deducted. If Borrower shall be required
by law or the administration thereof to deduct or withhold any Taxes from or in
respect of any sum payable under this Agreement or any other Loan Document: (i)
the sum payable shall be increased (and, for greater certainty, in the case of
interest, the amount of interest shall be increased) as may be necessary so that
after making all required deductions or withholdings (including deductions or
withholdings applicable to additional amounts paid under this Section 2.10)
Foothill receives an amount equal to the sum it would have received if no
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deductions or withholdings had been made; (ii) Borrower shall make such
deductions or withholdings; and (iii) Borrower shall pay the full amount
deducted or withheld to the relevant taxation or other authority in accordance
with applicable law.
(B) Borrower shall pay any present or future stamp or documentary taxes or
any other foreign exchange, foreign investment, property or any other type of
taxes, charges, fees or costs or similar levies or any financial institutions
duty and debits tax which arise from any payment made under this Agreement or
any other Loan Document or from the execution, delivery or registration of, or
otherwise with respect to, this Agreement or any other Loan Document (all such
taxes, fees or charges, costs, and levies being herein referred to as "Other
Taxes")
(C) Borrower shall indemnify Foothill for the full amount of Taxes and
Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by
any jurisdiction on amounts payable under this Section 2.10) paid by Foothill
and any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes are correctly
or legally asserted so that, after the receipt of any indemnity payment under
this Section 2.10, Foothill shall be in the same position as it would have been
had it not been required to pay any Taxes or Other Taxes. Borrower shall also
indemnify Foothill on a after-tax basis for any additional taxes on net income
that Foothill may be obliged to pay as the result of the receipt of additional
amounts under this Section 2.10 (computed on the basis that the only receipts
and deductions of Foothill are in respect of the Obligations). Payment under
this indemnification shall be made within thirty (30) days from the date
Foothill makes written demand therefor. A certificate as to the amounts owing by
Borrower under this Section 2.10 submitted to Borrower by Foothill shall be
conclusive evidence, absent manifest error, of the amount due from Borrower to
Foothill. For greater certainty, the parties acknowledge that nothing contained
in this Section 2.10 shall be interpreted as requiring Borrower to pay to any
taxation authority any Taxes or Other Taxes owed by it to such taxation
authority and which are contested in good faith and by proper proceedings and
against which adequate reserves are maintained, provided that any such contest
of Taxes or Other Taxes shall have no effect on any rights of Foothill under
this Section 2.10, including without limitation, the right to receive
indemnification payments within thirty (30) days of written demand therefor.
(D) Borrower shall furnish to Foothill the original or a certified copy of
a receipt evidencing payment of Taxes or Other Taxes, promptly after receipt by
Borrower of any such receipt.
(E) If Foothill is, in its sole opinion, entitled to claim a refund or
able to apply for or otherwise take advantage of any tax credit, tax deduction
or similar benefit by reason of any withholding or deduction made by Borrower in
respect of a payment made by it hereunder which payment shall have been
increased pursuant to Section 2.10(a), then Foothill will use reasonable efforts
to obtain such refund, credit, deduction or benefit and upon receipt thereof
will pay to Borrower such amount (if any) not exceeding the increased amount
paid by Borrower as equals the net after-tax value to Foothill of such part of
such refund, credit, deduction or benefit as it considers is allocable to such
withholding or deduction having regard to all its dealings giving rise to
similar credits, deductions or benefits in relation to the same tax period and
to the cost of obtaining the same. There is no obligation for Foothill to claim
any refund or to apply for or take advantage of any tax credit, tax deduction or
similar benefit as contemplated by this paragraph.
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Nothing herein shall (i) interfere with the right of Foothill to arrange its tax
affairs in whatever manner it deems appropriate; and (ii) Foothill shall not be
obligated to disclose to Borrower any information regarding its tax affairs or
tax computations, except to the extent that such information is necessary to
determine Borrower's liability hereunder. Further, Foothill shall not be under
any obligation to claim relief from its corporate profits or similar tax
liability in respect to any such deduction or withholding in priority to any
other relief, claims, credits or deductions available to it.
(f) Notwithstanding anything in this Section 2.10 to the contrary, at no
time shall Borrower be obligated to pay any corporate level excise tax,
franchise tax, income tax or any privilege tax measured based on income of
Foothill.
(g) Without prejudice to the survival of any other agreement or obligation
of the Borrower hereunder, the obligations of Borrower under this Section 2.10
shall survive the payment in full of the Obligations.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE AND LETTER OF CREDIT.
The obligation of Foothill to make the initial Advance or to issue the initial
Letter of Credit is subject to the fulfillment, to the satisfaction of Foothill
and its counsel, of each of the following conditions on or before the Closing
Date:
(A) the Closing Date shall occur on or before July 31, 1997;
(B) Foothill shall have received searches reflecting the filing
of its financing statements;
(C) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
(1) the Lockbox Agreements;
(2) the Disbursement Letter;
(3) the Pay-Off Letter, UCC termination statements and
other documentation evidencing the termination by Existing Lender of its Liens
in and to the properties and assets of Borrower, and UCC termination statements
for all other Liens in and to the properties and assets of Borrower that are not
Permitted Liens; and
(4) the Subordination Agreement, the Trademark Security
Agreement, the Patent Security Agreement, and the other Loan Documents;
(D) Foothill shall have received a certificate from the
Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution, delivery, and performance of this Agreement
and the other Loan Documents to which Borrower is a party and authorizing
specific officers of Borrower to execute the same;
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(E) Foothill shall have received copies of Borrower's Governing
Documents, as amended, modified, or supplemented to the Closing Date, certified
by the Secretary of Borrower;
(F) Foothill shall have received a certificate of status with
respect to Borrower, dated within ten (10) days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate that Borrower is in
good standing in such jurisdiction;
(G) Foothill shall have received certificates of status with
respect to Borrower, each dated within fifteen (15) days of the Closing Date,
such certificates to be issued by the appropriate officer of the jurisdictions
in which its failure to be duly qualified or licensed would constitute a
Material Adverse Change, which certificates shall indicate that Borrower is in
good standing in such jurisdictions;
(H) Foothill shall have received a certificate of insurance,
together with the endorsements thereto, as are required by Section 6.10, the
form and substance of which shall be satisfactory to Foothill and its counsel;
(I) Foothill shall have received such Collateral Access
Agreements from lessors, warehousemen, bailees, and other third persons as
Foothill may require;
(J) Foothill shall have received an opinion of Borrower's
counsel in form and substance satisfactory to Foothill and its counsel in their
sole discretion;
(K) After giving effect to the making of the requested initial
Advance hereunder, Borrower shall have demonstrated that it has, on the Closing
Date, funds available to be borrowed hereunder in an aggregate amount equal to
or greater than $500,000;
(L) Foothill shall have received satisfactory evidence that all
tax returns required to be filed by Borrower have been timely filed and all
taxes upon Borrower or its properties, assets, income, and franchises (including
real property taxes and payroll taxes) have been paid prior to delinquency,
except such taxes that are the subject of a Permitted Protest; and
(M) all other documents and legal matters in connection with the
transactions contemplated by this Agreement shall have been delivered, executed,
or recorded and shall be in form and substance satisfactory to Foothill and its
counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND ALL LETTERS OF CREDIT.
The following shall be conditions precedent to all Advances and all Letters of
Credit hereunder:
(A) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all respects
on and as of the date of such extension of credit, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
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(B) no Default or Event of Default shall have occurred and be
continuing on the date of such extension of credit, nor shall either result from
the making thereof, and
(C) no injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the extending of such credit
shall have been issued and remain in force by any governmental authority against
Borrower, Foothill, or any of their Affiliates.
3.3 CONDITION SUBSEQUENT. As a condition subsequent to initial
closing hereunder, Borrower shall perform or cause to be performed the following
(the failure by Borrower to so perform or cause to be performed constituting an
Event of Default):
(A) within thirty (30) days of the Closing Date, deliver to
Foothill the certified copies of the policies of insurance, together with the
endorsements thereto, as are required by Section 6.10, the form and substance of
which shall be satisfactory to Foothill and its counsel.
3.4 TERM. This Agreement shall become effective upon the execution
and delivery hereof by Borrower and Foothill and shall continue in full force
and effect for a term ending on the date (the "Maturity Date") that is four (4)
years from the Closing Date, unless sooner terminated pursuant to the terms
hereof. The foregoing notwithstanding, Foothill shall have the right to
terminate its obligations under this Agreement immediately and without notice
upon the occurrence and during the continuation of an Event of Default.
3.5 EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations (including contingent reimbursement obligations of
Borrower with respect to any outstanding Letters of Credit) immediately shall
become due and payable without notice or demand. No termination of this
Agreement, however, shall relieve or discharge Borrower of Borrower's duties,
Obligations, or covenants hereunder, and Foothill's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated.
3.6 EARLY TERMINATION BY BORROWER. Borrower has the option, at any
time upon ninety (90) days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, the Obligations (including an amount
equal to 102% of the undrawn amount of the Letters of Credit), in full, together
with a premium (the "Early Termination Premium") equal to (a) the Maximum
Amount, multiplied by (b) (i) four percent (4%) if such termination occurs prior
to the twelve month anniversary of the Closing Date, (ii), three percent (3%) if
such termination occurs after the twelve month anniversary of the Closing Date
but at any time during the thirteenth month after the Closing Date, and (iii)
(x) three percent (3%) minus (y) the product of (A) one-twelfth of one percent
(l/12%) multiplied by (B) the number of months after the thirteenth month
anniversary of the Closing Date during which such termination occurs, if such
termination occurs at any time after the thirteenth month anniversary of the
Closing Date; provided, however, any Early Termination Premium required to be
paid pursuant to the provisions of this Section shall be reduced by fifty
percent (50%) if such early termination occurs solely as a result of an initial
public offering of Borrower or the sale of all capital stock or
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all or substantially all assets of Borrower to any other Person other than a
Person that is an Affiliate of Borrower prior to such sale.
3.7 TERMINATION UPON EVENT OF DEFAULT. If Foothill terminates this
Agreement during the continuance of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Foothill as the result of the early termination
and Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this Section 3.7 shall
be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Foothill a
continuing security interest in all currently existing and hereafter acquired or
arising collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Foothill's security interest in
the Collateral shall attach to all Collateral without further act on the part of
Foothill or Borrower. Anything contained in this Agreement or any other Loan
Document to the contrary notwithstanding, except as permitted by Section 7.4,
Borrower has no authority, express or implied, to sell or dispose of any item or
portion of the Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower, immediately upon the request of Foothill, shall endorse and deliver
physical possession of such Negotiable Collateral to Foothill.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL. Upon the occurrence and during the continuation of an Event of
Default or if Foothill deems itself insecure, Foothill or Foothill's designee
may (a) notify customers or Account Debtors of Borrower that the Accounts,
General Intangibles, or Negotiable Collateral have been assigned to Foothill or
that Foothill has a security interest therein, and (b) collect the Account,
General Intangibles, and Negotiable Collateral directly and charge the
collection costs and expenses to the Loan Account. Borrower agrees that it will
hold in trust for Foothill, as Foothill's trustee, any Collections that it
receives and immediately will deliver said Collections to Foothill in their
original form as received by Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon
the request of Foothill, Borrower shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
account, letters of authority, and all other documents that Foothill reasonably
may request, in form reasonably satisfactory to Foothill, to perfect and
continue perfected Foothill's security interests in the Collateral, and in order
to fully consummate all of the transactions contemplated hereby and under the
other the Loan Documents.
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4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents designated by Foothill) as Borrower's true and lawful attorney, with
power to (a) if Borrower refuses to, or fails timely to execute and deliver any
of the documents described in Section 4.4, sign the name of Borrower on any of
the documents described in Section 4.4, (b) at any time that an Event of Default
has occurred and is continuing or Foothill deems itself insecure, sign
Borrower's name on any invoice or bill of lading relating to any Account, drafts
against Account Debtors, schedules and assignments of Accounts, verifications of
Accounts, and notices to Account Debtors, (c) send requests for verifications of
Account, (d) endorse Borrower's name on any Collection item that may come into
Foothill's possession, (e) at any time that an Event of Default has occurred and
is continuing or Foothill deems itself insecure, notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Foothill, to receive and open all mail addressed to Borrower, and
to retain all mail relating to the Collateral and forward all other mail to
Borrower, (f) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure, make, settle, and adjust all
claims under Borrower's policies of insurance and make all determinations and
decisions with respect to such policies of insurance, and (g) at any time that
an Event of Default has occurred and is continuing or Foothill deems itself
insecure, settle and adjust disputes and claims respecting the Accounts directly
with Account Debtors, for amounts and upon terms that Foothill determines to be
reasonable, and Foothill may cause to be executed and delivered any documents
and releases that Foothill determines to be necessary. The appointment of
foothill as Borrower's attorney, and each and every one of Foothill's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully and finally repaid and performed and Foothill's
obligation to extend credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter (during
normal business hours if no Event of Default then exists or at any time if an
Event of Default then exists) to inspect Borrower's Books and to check, test,
and appraise the Collateral in order to verify Borrower's financial condition or
the amount, quality, value, condition of, or any other matter relating to, the
Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement, Borrower
makes the following representations and warranties which shall be true, correct,
and complete in all respects as of the date hereof, and shall be true, correct,
and complete in all respects as of the Closing Date, and at and as of the date
of the making of each Advance or Letter of Credit thereafter, as though made on
and as of the date of such Advance or Letter of Credit (except to the extent
that such representations and warranties relate solely to an earlier date) and
such representations and warranties shall survive the execution and delivery of
this Agreement:
5.1 NO ENCUMBRANCES. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens except for Permitted Liens.
5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing
obligations created by the sale and delivery of Inventory or the rendition of
services to Account
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Debtors in the ordinary course of Borrower's business, unconditionally owed to
Borrower without defenses, disputes, offsets, counterclaims, or rights of return
or cancellation. The property giving rise to such Eligible Accounts has been
delivered to the Account debtor, or to the account Debtor's agent for immediate
shipment to and unconditional acceptance by the Account Debtor. Borrower has not
received notice of actual or imminent bankruptcy, insolvency, or material
impairment of the financial condition of any Account Debtor regarding any
Eligible Account.
5.3 ELIGIBLE INVENTORY. All Eligible Inventory is of good and
merchantable quality, free from known defects.
5.4 EQUIPMENT. All of the Equipment is used or held for use in
Borrower's business and is fit for such purposes.
5.5 LOCATION OF INVENTORY AND EQUIPMENT. Except for (a) Inventory-
in-transit in the ordinary course of business from one location on Schedule 6.12
to another location on Schedule 6.12 and (b) Inventory on consignment at King
Technology in accordance with Section 7.10 hereof, the Inventory and Equipment
are not stored with a bailee, consignee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on Schedule 6.12 or otherwise permitted by Section 6.12.
5.6 INVENTORY RECORDS. Borrower keeps correct and accurate records
itemizing and describing the kind, type, quality, and quantity of the Inventory,
and Borrower's cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive
office of Borrower is located at the address indicated in the preamble to this
Agreement and Borrower's FEIN is 62-1482176.
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(A) Borrower is duly organized and existing and in good standing
under the laws of the jurisdiction of its incorporation and qualified and
licensed to do business in, and in good standing in, any state where the failure
to be so licensed or qualified reasonably could be expected to have a Material
Adverse Change.
(B) Set forth on Schedule 5.8, is a complete and accurate list
of all shareholder of Borrower owning five (5) percent or more of Borrower's
capital stock as of the Closing Date, showing: (i) the number of shares of each
class of common and preferred stock authorized for Borrower; and (ii) the number
and the percentage of the outstanding shares of each such class owned by such
shareholders.
(C) Set forth on Schedule 5.8, is a complete and accurate list
of Borrower's direct and indirect subsidiaries, showing: (i) the jurisdiction of
their incorporation (ii) the number of shares of each class of common and
preferred stock authorized for each of such Subsidiaries; and (iii) the number
and the percentage of the outstanding shares of each such class owned directly
or indirectly by Borrower. All of the outstanding capital stock of each such
Subsidiary has been validly issued and is fully paid and non-assessable.
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(D) Except as set forth on Schedule 5.8, no capital stock (or
any securities, instruments, warrants, options, purchase rights, conversion or
exchange rights, calls, commitments or claims of any character convertible into
or exercisable for capital stock) of Borrower or any direct or indirect
Subsidiary of Borrower is subject to the issuance of any security, instrument,
warrant, option, purchase right, conversion or exchange right, call, commitment
or claim of any right, title, or interest therein or thereto.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(A) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(B) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party do not and will not (i)
violate any provision of federal, state, or local law or regulation (including
Regulations G, T, U, and X of the Federal Reserve Board) applicable to Borrower,
the Governing Documents of Borrower, or any order, judgment, or decree of any
court or other Governmental Authority binding on Borrower, (ii) conflict with,
result in a breach of, or constitute (with due notice or lapse of time or both)
a default under any material contractual obligation or material lease of
Borrower (including the Subordinated Debt), (iii) result in or require the
creation or imposition of any Lien of any nature whatsoever upon any properties
or assets of Borrower, other than Permitted Liens, or (iv) require any approval
of stockholders or any approval or consent of any Person under any material
contractual obligation of Borrower, except for Alcatel (which consent has been
obtained).
(C) Other than the filing of appropriate financing statements,
and the filing of the Trademark Security Agreement and the Patent Security
Agreement with the United States Patent and Trademark Office, the execution,
delivery, and performance by Borrower of this Agreement and the Loan Documents
to which Borrower is a party do not and will not require any registration with,
consent, or approval of, or notice to, or other action with or by, any federal,
state, foreign, or other Governmental Authority or other Person, except for
Alcatel (which consents has been obtained).
(D) This Agreement and the Loan Documents to which Borrower is a
party, and all other documents contemplated hereby and thereby, when executed
and delivered by Borrower will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to
or limiting creditors' rights generally.
(E) The Liens granted by Borrower to Foothill in and to its
properties and assets pursuant to this Agreement and the other Loan Documents
are validly created, perfected, and first priority Liens, subject only to
Permitted Liens.
5.10 LITIGATION. There are no actions or proceedings pending by or
against Borrower before any court or administrative agency and Borrower does not
have knowledge or
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belief of any pending, threatened, or imminent litigation, governmental
investigations, or claims, complaints, actions, or prosecutions involving
Borrower or any guarantor of the Obligations, except for; (a) ongoing collection
matters in which Borrower is the plaintiff: (b) matters disclosed on Schedule
5.10; and (c) matters arising after the date hereof that, if decided
adversely to Borrower, would not have a Material Adverse Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to
Borrower or any guarantor of the Obligations that have been delivered by
Borrower to Foothill have been prepared in accordance with GAAP (except, in the
case of unaudited financial statements, for the lack of footnotes and being
subject to year-end audit adjustments) and fairly present Borrower's (or such
guarantor's, as applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been a
Material Adverse Change with respect to Borrower (or such guarantor, as
applicable) since the date of the latest financial statements submitted to
Foothill on or before the Closing Date.
5.12 SOLVENCY. Borrower is Solvent. No transfer of property is being
made by Borrower and no obligation is being incurred by Borrower in connection
with the transactions contemplated by this Agreement or the other Loan Documents
with the intent to hinder, delay, or defraud either present or future creditors
of Borrower.
5.13 EMPLOYEE BENEFITS. None of Borrower, any of its Subsidiaries, or
any of their ERISA Affiliates maintains or contributes to any Benefit Plan,
other than those listed on Schedule 5.13. Borrower, each of its Subsidiaries and
each ERISA Affiliate have satisfied the minimum funding standards of ERISA and
the IRC with respect to each Benefit Plan to which it is obligated to
contribute. No ERISA Event has occurred nor has any other event occurred that
may result in an ERISA Event that reasonably could be expected to result in a
material Adverse Change. None of Borrower or its Subsidiaries, any ERISA
Affiliate, or any fiduciary of any Plan is subject to any direct or indirect
liability with respect to any Plan under any applicable law, treaty, rule,
regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA
Affiliate is required to provide security to any Plan under Section 401(a)(29)
of the IRC.
5.14 ENVIRONMENTAL CONDITION. None of Borrower's properties or assets
has ever been used by Borrower or, to the best of Borrower's knowledge, by
previous owners or operators in the disposal of, or to produce, store, handle,
treat, release, or transport, any Hazardous Materials. To the best of Borrower's
knowledge, none of Borrower's properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection statute as a
Hazardous Materials disposal site, or a candidate for closure pursuant to any
environmental protection statute. To the best of Borrower's knowledge, no Lien
arising under any environmental protection statute has attached to any revenues
or to any real or personal property owned or operated by Borrower. Borrower has
not received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal or state governmental agency concerning
any action or omission by Borrower resulting in the releasing or disposing of
Hazardous Materials into the environment.
6. AFFIRMATIVE COVENANTS.
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Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, and
unless Foothill shall otherwise consent in writing, Borrower shall do all of
the following:
6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables Borrower to produce financial statements in accordance
with GAAP, and maintain records pertaining to the Collateral that contain
information as from time to time may reasonably be requested by Foothill.
Borrower also shall keep a modern inventory reporting system that shows all
additions, sales, claims, returns, and allowances with respect to the Inventory.
6.2 COLLATERAL REPORTING. Provide Foothill with the following
document at the following times in form satisfactory to Foothill: (a) on each
Business Day, a sales journal, collection journal, and credit register since the
last such schedule and a calculation of the Borrowing Base as of such date, (b)
on a monthly basis and, in any event, by no later than the tenth (10/th/) day of
each month during the term of this Agreement, (i) a detailed calculation of the
Borrowing Base, and (ii) a detailed aging, by total, of the Accounts, together
with a reconciliation to the detailed calculation of the Borrowing Base
previously provided to Foothill, (c) on a monthly basis and, in any event, by no
later than the tenth (10/th/) day of each month during the term of this
Agreement, a summary aging, by vendor, of Borrower's accounts payable and any
book overdraft, (d) on a weekly basis, Inventory reports specifying Borrower's
cost and the wholesale market value of its Inventory by category, with
additional detail showing additions to and deletions from the Inventory, (e) on
each Business Day, notice of all returns, disputes, or claims, (f) upon request,
copies of invoices in connection with the Accounts, customer statement, credit
memos, remittance advices and reports, deposit slips, shipping and delivery
documents in connection with the Accounts and for Inventory and Equipment
acquired by Borrower, purchase orders and invoices, (g) on a quarterly basis, a
detailed list of Borrower's customers, (h) on a monthly basis, a calculation of
the Dilution for the prior month; and (i) such other reports as to the
Collateral or the financial condition of Borrower as Foothill may request from
time to time. Original sales invoices evidencing daily sales shall be mailed by
Borrower to each Account Debtor and, upon the occurrence of an Event of Default
or at Foothill's request if Foothill deems itself insecure, the invoices shall
indicate on their face that the Account has been assigned to Foothill and that
all payments are to be made directly to Foothill.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Deliver to
Foothill: (i) as soon as available, but in any event within forty-five (45) days
after the end of each month during each of Borrower's fiscal years, a company
prepared balance sheet, income statement, and statement of cash flow covering
Borrower's operations during such period; (ii) as soon as available, but in any
event within forty-five (45) days after the end of each fiscal year of Borrower,
a company prepared balance sheet, income statement, and statement of cash flow
covering Borrower's operations during such period, and (iii) as soon as
available, but in any event within ninety (90) days after the end of each of
Borrower's fiscal years, financial statements of Borrower for each such fiscal
year, audited by independent certified public accountants reasonably acceptable
to Foothill and certified, without any qualifications, by such accountants to
have been prepared in accordance with GAAP, together with a certificate of such
addressed to Foothill stating that such accountants do not have knowledge of the
existence of any Default or Event of Default. Such audited financial statements
shall include a balance sheet,
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profit and loss statement, and statement of cash flow and, if prepared, such
accountants' letter to management. If Borrower is a parent company of one or
more Subsidiaries, or Affiliates, or is a Subsidiary or Affiliate of another
company, then, in addition to the financial statements referred to above,
Borrower agrees to deliver financial statements prepared on a consolidating
basis so as to present Borrower and each such related entity separately, and on
a consolidated basis.
(B) Together with the above, if Borrower becomes a public
corporation, Borrower also shall deliver to Foothill Borrower's Form 10-Q
Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and
any other filings made by Borrower with the Securities and Exchange Commission,
if any, as soon as the same are filed, or any other information that is provided
by Borrower to its shareholders, and any other report reasonably requested by
Foothill relating to the financial condition of Borrower, and if Parent becomes
a public corporation, Borrower shall also deliver to Foothill each of the above-
referenced reports of, and filings made by, Parent.
(C) (1) Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrower shall deliver to Foothill a certificate
signed by its chief financial officer stating that: (x) all financial statements
delivered or caused to be delivered to Foothill hereunder have been prepared in
accordance with GAAP (except with respect to the equity adjustment made with
respect to the entry of the Alcatel Debt as a liability of Borrower and except,
in the case of unaudited financial statements, for the lack of footnotes and
being subject to year-end audit adjustments) and fairly present the financial
condition of Borrower, (y) the representations and warranties of Borrower
contained in this Agreement and the other Loan Documents are true and correct in
all material respects on and as of the date of such certificate, as though made
on and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date), and (z) on the date of delivery of
such certificate to Foothill there does not exist any condition or event that
constitutes a Default or Event of Default (or, in the case of clauses (x) or
(y), to the extent of any non-compliance, describing such non-compliance as to
which he or she may have knowledge and what action Borrower has taken, is
taking, or proposes to take with respect thereto); and (ii) each fiscal year,
together with the financial statements provided pursuant to Section 6.3(a)(ii)
for such fiscal year, Borrower shall deliver to Foothill a certificate signed by
its chief financial officer certifying the EBITDA as of the end of such fiscal
year and showing in reasonable detail the calculation thereof.
(D) Borrower shall have issued written instructions to its
independent certified public accounts authorizing them to communicate with
Foothill and to release to Foothill whatever financial information concerning
Borrower that Foothill may request and that is in such accountant's possession,
custody or control. Borrower hereby irrevocably authorizes and directs all
auditors, accountants, or other third parties to deliver to Foothill, at
Borrower's expense, copies of Borrower's financial statements, papers related
thereto, and other accounting records of any nature in their possession, and to
disclose to Foothill any information they may have regarding Borrower's business
affairs and financial conditions. In all cases, Foothill shall request that
Borrower obtain and provide such information to Foothill and give Borrower a
reasonable opportunity to so provide same and only if the requested information
is not so provided shall Foothill request such information directly from such
auditors, accountants or other third parties.
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(E) Borrower shall deliver to Foothill, promptly after its
preparation of same, copies of all notices and, upon the request of Foothill,
copies of such other information provided to the holder of the Subordinated
Debt, and promptly after its receipt of same, copies of all notices or other
documents received from the holder of the Subordinated Debt.
6.4 TAX RETURNS. Deliver to Foothill copies of each of Borrower's future
federal income tax returns, and any amendments thereto, within thirty (30) days
of the filing thereof with the Internal Revenue Service.
6.5 GUARANTOR REPORTS. Intentionally Omitted.
6.6 RETURNS. Cause returns and allowances, if any, as between Borrower
and its Account Debtors to be on the same basis and in accordance with the usual
customary practices of Borrower, as they exist at the time of the execution and
delivery of this Agreement. If, at a time when no Event of Default has occurred
and is continuing, any Account Debtor returns any Inventory to Borrower,
Borrower promptly shall determine the reason for such return and, if Borrower
accepts such return, issue a credit memorandum (with a copy to be sent to
Foothill) in the appropriate amount to such Account Debtor. If, at a time when
an Event of Default has occurred and is continuing, any Account Debtor returns
any Inventory to Borrower, Borrower promptly shall determine the reason for such
return and, if Foothill consents (which consent shall not be unreasonably
withheld), issue a credit memorandum (with a copy to be sent to Foothill) in the
appropriate amount to such Account Debtor.
6.7 TITLE TO EQUIPMENT. Upon Foothill's reasonable request, Borrower
immediately shall deliver to Foothill, properly endorsed, any and all evidences
of ownership of, certificates of title, or applications for title to any items
of Equipment.
6.8 MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good operating
condition and repair (ordinary wear and tear excepted), and make all necessary
replacements thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved. Other than those items of Equipment that
constitute fixtures on the Closing Date, Borrower shall not permit any item of
Equipment to become a fixture to real estate or an accession to other property,
and such Equipment shall at all times remain personal property.
6.9 TAXES. Cause all assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against Borrower
or any of its property to be paid in full, before delinquency or before the
expiration of any extension period, except to the extent that the validity of
such assessment or tax shall be the subject of a Permitted Protest. Borrower
shall made due and timely payment or deposit of all such federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Foothill, on demand, appropriate certificates attesting
to the payment thereof or deposit with respect thereto. Borrower will make
timely payment or deposit of all tax payments and withholding taxes required of
it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Foothill with proof reasonably satisfactory to Foothill indicating that
Borrower has made such payments or deposits.
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6.10 INSURANCE.
(A) At its expense, keep the Collateral insured against loss or
damage by fire, theft, explosion, sprinklers, and all other hazards and risks,
and in such amounts, as are ordinarily insured against by other owners in
similar businesses. Borrower also shall maintain business interruption, public
liability, product liability, and property damage insurance relating to
Borrower's ownership and use of the Collateral, as well as insurance against
larceny, embezzlement, and criminal misappropriation.
(B) All such policies of insurance shall be in such form, with such
companies, and in such amounts as may be reasonably satisfactory to Foothill.
All insurance required herein shall be written by companies which are authorized
to do insurance business in the State of California. All hazard insurance and
such other insurance as Foothill shall specify, shall contain a California Form
438BFU (NS) mortgagee endorsement, or an equivalent endorsement satisfactory to
Foothill, showing Foothill as sole loss payee thereof and shall contain a waiver
of warranties. Every policy of insurance referred to in this Section 6.10 shall
contain an agreement by the insurer that it will not cancel such policy except
after thirty (30) days prior written notice to Foothill and that any loss
payable thereunder shall be payable notwithstanding any act or negligence of
Borrower or Foothill which might, absent such agreement, result in a forfeiture
of all or a part of such insurance payment and notwithstanding (i) occupancy or
use of the Collateral for purposes more hazardous than permitted by the terms of
such policy or (ii) any change in title or ownership of the Collateral. Borrower
shall deliver to Foothill certified copies of such policies of insurance and
evidence of the payment of all premiums therefor.
(C) Original policies or certificates thereof satisfactory to
Foothill evidencing such insurance shall be delivered to Foothill at least (30)
days prior to the expiration of the existing or preceding policies. Borrower
shall give Foothill prompt notice of any loss covered by such insurance, and
Foothill shall have the right to adjust any loss. Foothill shall have the
exclusive right to adjust all losses payable under any such insurance policies
without any liability to Borrower whatsoever in respect of such adjustments. Any
monies received as payment for any loss under any insurance policy including the
insurance policies mentioned above, shall be paid over to Foothill to be applied
at the option of Foothill either to the prepayment of the Obligations without
premium, in such order or manner as Foothill may elect, or shall be disbursed to
Borrower under stage payment terms satisfactory to Foothill for application to
the cost of repairs, replacements, or restorations. All repairs, replacements,
or restorations shall be effected with reasonable promptness and shall be of a
value at least equal to the value of the items or property destroyed prior to
such damage or destruction. Upon the occurrence of an Event of Default, Foothill
shall have the right to apply all prepaid premiums to the payment of the
Obligations in such order or form as Foothill shall determine.
(D) Borrower shall not take out separate insurance concurrent in form
or contributing in the event of loss with that required to be maintained under
this Section 6.10, unless Foothill is included thereon as named insured with the
loss payable to Foothill under a standard California 438BFU (NS) Mortgagee
endorsement, or its local equivalent. Borrower immediately shall notify Foothill
whenever such separate insurance is taken out, specifying the
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insurer thereunder and full particulars as to the policies evidencing the same,
and originals of such policies immediately shall be provided to Foothill.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and under the
other Loan Documents by or on behalf of Borrower without setoff or counterclaim
and free and clear of, and without deduction or withholding for or on account
of, any federal, state, or local taxes.
6.12 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and Equipment
only at the locations identified on Schedule 6.12; provided, however, that
Borrower may amend Schedule 6.12 so long as such amendment occurs by written
notice to Foothill not less than thirty (30) days prior to the date on which the
Inventory or Equipment is moved to such new location, so long as such new
location is within the continental United States, and so long as, at the time of
such written notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Foothill's security
interests in such assets and also provides to Foothill a Collateral Access
Agreement.
6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all applicable
laws, rules, regulations, and orders of any governmental authority, including
the Fair Labor Standards Act and the Americans With Disabilities Act, other than
laws, rules, regulations, and orders the non-compliance with which, individually
or in the aggregate, would not have and could not reasonably be expected to
result in a Material Adverse Change.
6.14 EMPLOYEE BENEFITS.
(A) Promptly, and in any event within ten (10) Business Days after
Borrower or any of its Subsidiaries knows or has reason to know that an ERISA
Event has occurred that reasonably could be expected to result in a Material
Adverse Change, deliver to Foothill a written statement of the chief financial
officer of Borrower describing such ERISA Event and any action that is being
taking with respect thereto by Borrower, any such Subsidiary or ERISA Affiliate,
and any action taken or threatened by the IRS, Department of Labor, or PBGC.
Borrower or such Subsidiary, as applicable, shall (i) be deemed to know all
facts known by the administrator of any Benefit Plan of which it is the plan
sponsor, (ii) promptly, and in any event within three (3) Business Days after
the filing thereof with the IRS, deliver to Foothill a copy of each funding
waiver request filed with respect to any Benefit Plan and all communications
received by Borrower, any of its Subsidiaries or, to the knowledge of Borrower,
any ERISA Affiliate with respect to such request, and (iii) promptly, and in any
event within three (3) Business Days after receipt by Borrower, any of its
Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of the
PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to
administer a Benefit Plan, deliver to Foothill copies of each such notice.
(B) Cause to be delivered to Foothill, upon Foothill's request, each
of the following: (i) a copy of each Plan (or, where any such plan is not in
writing, complete description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of Borrower or its Subsidiaries;
(ii) the most recent determination letter issued by the IRS with respect to each
Benefit Plan; (iii) for the
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three most recent plan years, annual reports on Form 5500 Series required to be
filed with any governmental agency for each Benefit Plan; (iv) all actuarial
reports prepared for the last three plan years for each Benefit Plan; (v) a
listing of all Multiemployer Plans, with the aggregate amount of the most recent
annual contributions required to be made by Borrower or any ERISA Affiliate to
each such plan and copies of the collective bargaining agreements requiring such
contributions; (vi) any information that has been provided to Borrower or any
ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan; and
(vii) the aggregate amount of the most recent annual payments made to former
employees of Borrower or its Subsidiaries under any Retiree Health Plan.
6.15 LEASES. Pay when due all rents and other amounts payable under any
leases to which Borrower is a party or by which Borrower's properties and assets
are bound, unless such payments are the subject of a Permitted Protest. To the
extent that Borrower fails timely to make payment of such rents and other
amounts payable when due under its leases, Foothill shall be entitled, in its
discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until full and final payment of the Obligations, Borrower will
not do any of the following without Foothill's prior written consent:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(A) Indebtedness evidenced by this Agreement, together with
Indebtedness to issuers of letters of credit that are the subject of L/C
Guarantees;
(B) Indebtedness set forth on Schedule 7.1 and in existence on
the Closing Date;
(C) Indebtedness secured by Permitted Liens;
(D) the Alcatel Debt and the Subordinated Debt,
(E) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b) and (c) of this Section 7.1 (and continuance or
renewal of any Permitted Liens associated therewith) so long as: (i) the terms
and conditions of such refinancings, renewals, or extensions do not materially
impair the prospects of repayment of the Obligations by Borrower, (ii) the net
cash proceeds of such refinancings, renewals, or extensions do not result in an
increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Foothill as those applicable to
the refinanced Indebtedness; and
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(F) Indebtedness permitted by Section 7.6 of this Agreement.
7.2 LIENS. Create, incur, assume, or permit to exist, directly or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(e) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any merger,
consolidation, or reorganization, or, except in connection with the Subordinated
Lender's conversion of the Subordinated Debt into equity of Borrower in
accordance with the documents evidencing the Subordinated Debt as in effect on
the Closing Date, any recapitalization or reclassification of its capital stock,
or liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of,
in one transaction or a series of transactions, all or any substantial part of
its property or assets.
7.4 SALE OR DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or
otherwise dispose of any of Borrower's properties or assets other than (a) the
sale of Inventory in the ordinary course of Borrower's business and (b) physical
assets disposed of or replaced in the ordinary course of Borrower's business as
currently conducted and in an aggregate amount not exceeding $100,000 during any
fiscal year.
7.5 CHANGE NAME. Change Borrower's name, FEIN, corporate structure
(within the meaning of Section 11-9-402(7) of the Code), or identity, or add any
new fictitious name.
7.6 GUARANTEE. Guarantee or otherwise become in any way liable with
respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Foothill.
7.7 NATURE OF BUSINESS. Make any change in the principal nature of
Borrower's business.
7.8 REPAYMENTS, PREPAYMENTS AND AMENDMENTS.
(A) Make any payment on (i) the Subordinated Debt; provided,
however, if no Default or Event of Default then exists or would be caused
thereby, Borrower may make regularly scheduled payments of interest on the
Subordinated Debt; to the extent permitted by the Subordination Agreement; and
(ii) the Alcatel Debt; provided, however, if no Default or Event of Default then
exists or would be caused thereby, Borrower may make regularly scheduled
payments of principal and interest on the Alcatel Debt if (x) after giving
effect to such payments and of other Advances to be made hereunder on such date,
Borrower shall have borrowing availability hereunder of not less than $50,000,
and (y) the aggregate amount of all principal payments an the Alcatel Debt
(whether made directly to Alcatel or via a distribution to Parent) made by
Borrower during the term of this Agreement does not exceed $1,000,000;
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(B) Except in connection with a refinancing permitted by Section
7.1(e), prepay, redeem, retire, defease, purchase, or otherwise acquire any
Indebtedness owing to any third Person, other than the Obligations in accordance
with this Agreement; and
(C) Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of any agreement, instrument, document,
indenture, or other writing evidencing or concerning Indebtedness permitted
under Sections 7.1 (b), (c), (d) or (e); provided, however, Borrower may amend
the Alcatel Debt to extend the scheduled repayment thereof.
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control, except, with the prior written consent of
Foothill (and if no Event of Default then exists, which consent shall not be
unreasonably withheld), in connection with the conversion of Indebtedness of
Borrower into equity securities of Borrower or other recapitalization of the
stock of Borrower.
7.10 CONSIGNMENTS. Except for Inventory on consignment at King
Technology in amounts and in a manner consistent with Borrower's past business
practices and fully disclosed to Foothill, at any time, consign any Inventory or
sell any Inventory on bill and hold, sale or return, sale on approval, or other
conditional terms of sale.
7.11 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding; provided, however, so long as no Default
or Event of Default then exists or would be caused thereby, if Borrower's
financial performance is equal to or better than that set forth in the
Projections, Borrower may make distributions to Parent which, together with all
distributions made to Parent during the term of this Agreement by Cortelco
International, Inc. and Cortelco Puerto Rico, Inc., do not exceed in the
aggregate $750,000. Additionally, Borrower may make a distribution to Parent for
payment of the Alcatel Debt to the extent such payment is permitted by Section
7.8(a)(ii).
7.12 ACCOUNTING METHODS. Modify or change its method of accounting or
enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting records without
said accounting firm or service bureau agreeing to provide Foothill information
regarding the Collateral or Borrower's financial condition. Borrower waives the
right to assert a confidential relationship, if any, it may have with any
accounting firm or service bureau in connection with any information requested
by Foothill pursuant to or in accordance with this Agreement, and agrees that
Foothill may contact directly any such accounting firm or service bureau in
order to obtain such information.
7.13 INVESTMENTS. Except as disclosed on Schedule 7.13 and except for
investments of the type described in clauses (a) and (b) below which do not
exceed $100,000 in an aggregate at any time owned by Borrower, directly or
indirectly (a) make or acquire, or incur any liabilities (including contingent
obligations) for or in connection with, any loan or advance to, or capital
contribution in, any Person, (b) acquire the securities (whether debt
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or equity) of, or other interests in, any Person, or (c) acquire all or
substantially all of the properties or assets of a Person.
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms, that are fully disclosed to Foothill, and that
are no less favorable to Borrower than would be obtained in an arm's length
transaction with a non-Affiliate. Additionally, other than as permitted by
Section 7.11 hereof, Borrower shall not make any loan or advance or otherwise
transfer any funds (whether pursuant to an accounting entry on Borrower's or
Parent's books or otherwise) to an Affiliate without the prior written consent
of Foothill.
7.15 SUSPENSION. Suspend or go out of a substantial portion of its
business.
7.16 COMPENSATION. Increase the annual fee or per-meeting fees paid
to directors during any year by more than twenty-five percent (25%) over the
prior year; or pay or accrue total cash compensation, during any year, to
officers and senior management employees appointed or employed as of the Closing
Date in an aggregate amount in excess of 120% of that paid or accrued in the
prior year. Borrower shall not pay or accrue total cash compensation, during any
year, to officers and senior management employees that are appointed or
initially employed after the Closing Date in an amount in excess of that which
is customary in Borrower's industry and consistent with Borrower's past business
practices.
7.17 USE OF PROCEEDS. Use the proceeds of the Advances made hereunder
for any purpose other than (a) on the Closing Date, (i) to repay in full the
principal, accrued interest, and accrued fees and expenses owing to Existing
Lender, and (ii) to pay transactional costs and expenses incurred in connection
with this Agreement, and (b) thereafter, consistent with the terms and
conditions hereof, for its lawful and permitted corporate purposes.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing thirty (30) days prior written notification thereof to
Foothill and so long as, at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary to perfect and
continue perfected Foothill's security interests and also provides to Foothill a
Collateral Access Agreement with respect to such new location. The Inventory and
Equipment shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Foothill's prior written consent.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or indirectly:
(A) engage, or permit any Subsidiary of Borrower to engage, in
any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;
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(B) permit to exist with respect to any Benefit Plan any accumulated
funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC),
whether or not waived;
(C) fail, or permit any Subsidiary of Borrower to fail, to pay timely
required contributions or annual installments due with respect to any waived
finding deficiency to any Benefit Plan;
(D) terminate, or permit any Subsidiary of Borrower to terminate, any
Benefit Plan where such event would result in any liability of Borrower, any of
its Subsidiaries or any ERISA Affiliate under Title IV of ERISA;
(E) fail, or permit any Subsidiary of Borrower to fail, to make any
required contribution or payment to any Multiemployer Plan;
(F) fail, or permit any Subsidiary of Borrower to fail, to pay any
required installment or any other payment required under Section 412 of the IRC
on or before the due date for such installment or other payment;
(G) amend, or permit any Subsidiary of Borrower to amend, a Plan
resulting in an increase in current liability for the plan year such that either
of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is required to
provide security to such Plan under Section 401(a)(29) of the IRC; or
(H) withdraw, or permit any Subsidiary of Borrower to withdraw, from
any Multiemployer Plan where such withdrawal is reasonably likely to result in
any liability of any such entity under Title IV of ERISA.
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $100,000.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when declared
due and payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the provisions of the Bankruptcy Code,
would have accrued on such amounts), fees and charges due Foothill,
reimbursement of Foothill Expenses, or other amounts constituting Obligations);
8.2 If Borrower fails or neglects to perform, keep, or observe any
term, provision, condition, covenant, or agreement contained in Section 2, or
subsections 3.6 or 3.7, or Section 4.6 (other than subsections 6.4, 6.5, 6.8,
6.13, 6.14, or 6.15), or 7 of this Agreement;
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8.3 If Borrower fails or neglects to perform, keep, or observe any
term, provision, condition, covenant, or agreement contained in subsections 6.4,
6.5, 6.8, 6.13, 6.14 or 6.15, or any other section of this Agreement not
referenced elsewhere in this Section 8, or in any of the Loan Documents, or in
any other present or future agreement between Borrower and Foothill and such
failure is not cured or remedied within five (5) days;
8.4 If there is a Material Adverse Change;
8.5 If any material portion of Borrower's properties or assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any third Person;
8.6 If an Insolvency Proceeding is commenced by Borrower;
8.7 If an Insolvency Proceeding is commenced against Borrower and any
of the following events occur: (a) Borrower consents to the institution of the
Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within forty-five (45) calendar days of
the date of the filing thereof; provided, however, that, during the pendency of
such period, Foothill shall be relieved of its obligation to extend credit
hereunder; (d) an interim trustee is appointed to take possession of all or a
substantial portion of the properties or assets of, or to operate all or any
substantial portion of the business of, Borrower; or (e) an order for relief
shall have been issued or entered therein;
8.8 If Borrower is enjoined, restrained, or in any way prevented by
court order from continuing to conduct all or any material part of its business
affairs;
8.9 If a notice of Lien, levy, or assessment is filed of record with
respect to any of Borrower's properties or assets having an aggregate value in
excess of $200,000 by the United States Government, or any department, agency,
or instrumentality thereof, or by any state, county, municipal, or governmental
agency, or if any taxes or debts owing at any time hereafter to any one or more
of such entities becomes a Lien, whether choate or otherwise, upon any of
Borrower's properties or assets and the same is not paid on the payment date
thereof (Borrower expressly acknowledges that Foothill may establish a reserve
for the amount of any Lien of any governmental authority filed with respect to
or affecting any of the Collateral);
8.10 If a judgment or other, claim becomes a Lien or encumbrance upon
any material portion of Borrower's properties or assets;
8.11 (a) If any default occurs under the Subordinated Debt, or (b) if
there is a default in any other material agreement to which Borrower is a party
with one or more third Persons and such default (i) occurs at the final maturity
of the obligations thereunder, or (ii) results in a right by such third
Person(s), irrespective of whether exercised, to accelerate the maturity of
Borrower's obligations thereunder;
8.12 If Borrower makes any payment on account of Indebtedness that has
been contractually subordinated in right of payment to the payment of the
Obligations, except to the
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extent such payment is expressly permitted hereunder and by the terms of the
subordination provisions applicable to such Indebtedness;
8.13 If any material misstatement or misrepresentation exists now or
hereafter in any warranty, representation, statement, or report made to Foothill
by Borrower or any officer, employee, agent, or director of Borrower, or if any
such warranty or representation is withdrawn; or
8.14 If the obligation of any guarantor under its guaranty or other
third Person under any Loan Document is limited or terminated by operation of
law or by the guarantor or other third Person thereunder, or any such guarantor
or other third Person becomes the subject of an Insolvency Proceeding.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(A) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable;
(B) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, under any of the Loan Documents, or
under any other agreement between Borrower and Foothill;
(C) Terminate this Agreement and any of the other Loan Documents
as to any future liability or obligation of Foothill, but without affecting
Foothill's rights and security interests in the Collateral and without affecting
the Obligations;
(D) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Foothill considers advisable, and in
such cases, Foothill will credit Borrower's Loan Account with only the net
amounts received by Foothill in payment of such disputed Accounts after
deducting all Foothill Expenses incurred or expended in connection therewith;
(E) Cause Borrower to hold all returned Inventory in trust for
Foothill, segregate all returned Inventory from all other property of Borrower
or in Borrower's possession and conspicuously label said returned Inventory as
the property of Foothill;
(F) Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Foothill considers necessary or
reasonable to protect it security interests in the Collateral. Borrower agrees
to assemble the Collateral if Foothill so requires, and to make the Collateral
available to Foothill as Foothill may designate. Borrower authorizes Foothill to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or Lien that in Foothill's determination
appears to conflict with its security interests and to pay all expenses incurred
in connection therewith. With respect to any of
43.
<PAGE>
Borrower's owned or leased premises, Borrower hereby grants Foothill a license
to enter into possession of such premises and to occupy the same, without
charge, for up to one hundred twenty (120) days in order to exercise any of
Foothill's rights or remedies provided herein, at law, in equity, or otherwise;
(G) Without notice to Borrower (such notice being expressly waived),
and without constituting a retention of any collateral in satisfaction of an
obligation (within the meaning of Section 11-9-505 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits of Borrower held
by Foothill (including any amounts received in the Lockbox Accounts), or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Foothill;
(H) Hold, as cash collateral, any and all balances and deposits of
Borrower held by Foothill, and any amounts received in the Lockbox Accounts, to
secure the full and final repayment of all of the Obligations.
(I) Seek the appointment of a receiver or keeper to take possession of
the Collateral and to enforce any of Foothill's remedies with respect to such
appointment without prior notice or hearing;
(J) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral, Foothill is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademark, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Foothill's
benefit.
(K) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including Borrower's premises) as Foothill determines
is commercially reasonable. It is not necessary that the Collateral be present
at any such sale;
(L) Foothill shall give notice of the disposition of the Collateral as
follows:
(1) Foothill shall give Borrower and each holder of a security
interest in the Collateral who has filed with Foothill a written request for
notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after which the private sale or
other disposition is to be made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower as provided in Section 12, at least five (5) days before
the date fixed for the sale, or at least five (5) days before the date on or
after which the private sale or other disposition is to be made; no notice needs
to be given prior to the disposition of any portion of the Collateral that is
perishable or threatens to decline speedily in value or that is of a type
customarily sold on
44.
<PAGE>
a recognized market. Notice to Persons other than Borrower claiming an interest
in the Collateral shall be sent to such addresses as they have furnished to
Foothill;
(3) If the sale is to be a public sale, Foothill also shall
give notice of the time and place by publishing a notice one time at least five
(5) days before the date of the sale in a newspaper of general circulation in
the county in which the sale is to be held,
(M) Foothill may credit bid and purchase at any public sale;
(N) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Foothill to Borrower; and
(O) Borrower hereby acknowledges that the Obligations arose out
of a commercial transaction, and agrees that if an Event of Default shall occur
Foothill shall have the right to an immediate writ of possession without notice
of a hearing. Foothill shall have the right to the appointment of a receiver for
the Collateral, and Borrower hereby consents to such rights and such appointment
and hereby waives any objection Borrower may have thereto or the right to have a
bond or other security posted by Foothill in connection therewith.
9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Foothill shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Foothill of one
right or remedy shall be deemed an election, and no waiver by Foothill of any
Event of Default shall be deemed a continuing waiver. No delay by Foothill
shall constitute a waiver election, or acquiescence by it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes, assessment, insurance
premiums, or, in the case of leased properties or assets, rents or other amounts
payable under such leases) due to third Persons, or fails to make any deposits
or furnish any required proof of payment or deposit, all as required under the
terms of this Agreement, then, to the extent that Foothill determines that such
failure by Borrower could result in a Material Adverse Change, in its discretion
and without prior notice to Borrower, Foothill may do any or all of the
following: (a) make payment of the same or any part thereof, (b) set up such
reserves in Borrower's Loan Account as Foothill deems necessary to protect
Foothill from the exposure created by such failure; or (c) obtain and maintain
insurance policies of the type described in Section 6.10, and take any action
with respect to such policies as Foothill deems prudent. Any such amounts paid
by Foothill shall constitute Foothill Expenses. Any such payments made by
Foothill shall not constitute an agreement by Foothill to make similar payments
in the future or a waiver by Foothill of any Event of Default under this
Agreement. Foothill need not inquire as to, or contest the validity of, any
such expense, tax, or Lien and the receipt of the usual official advice for the
payment thereof shall be conclusive evidence that the same was validly due and
owing.
45.
<PAGE>
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which Borrower may in any way be liable.
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill complies
with its obligations, if any, under Section 11-9-207 of the Code, Foothill shall
not in any way or manner be liable or responsible for: (a) the safekeeping of
the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding agency,
or other Person. All risk of loss, damage, or destruction of the Collateral
shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend, and hold
Foothill, and each of its officers, directors, employees, counsel, agents, and
attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest
extent permitted by law) from and against any and all claims, demands, suits,
actions, investigations, proceedings, and damages, and all reasonable attorney's
fees and disbursements and other costs and expenses actually incurred in
connection therewith (as and when they are incurred and irrespective of whether
suit is brought), at any time asserted against, imposed upon, or incurred by any
of them in connection with or as a result of or related to the execution,
delivery, enforcement, performance, and administration, of this Agreement and
any other Loan Document, or the use of the proceeds of the credit provided
hereunder (irrespective of whether any Indemnified Person is a party thereto),
or any act, omission, event or circumstance in any manner related thereto (all
the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have
no obligation to any Indemnified Person under this Section 11.3 for
consequential damages or with respect to any Indemnified Liability that a court
of competent jurisdiction finally determines to have resulted from the gross
negligence or willful misconduct of such Indemnified Person. This provision
shall survive the termination of this Agreement and the repayment of the
Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other Loan Document shall be in writing
and (except for financial statements and other informational documents which may
be sent by first-class mail, postage prepaid) shall be personally delivered or
sent by registered or certified mail (postage prepaid, return receipt
requested), overnight courier, or telefacsimile to Borrower or to Foothill, as
the case may be, at its address set forth below:
IF TO BORROWER: CORTELCO SYSTEMS, INC.
4119 Willow Lake Boulevard
Memphis, Tennessee 38118
Attn: James D. Finn
Fax No. 901-795-0352
46.
<PAGE>
WITH A COPY TO: BAKER, DONELSON, BEARMAN &
CALDWELL
165 Madison Avenue, 20th Floor
Memphis, Tennessee 38103
Attn: Charles T. Tuggle, Jr., Esq.
Fax No. 901-577-2303
IF TO FOOTHILL: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. (310) 478-9788
WITH A COPY TO: PAUL, HASTINGS, JANOFSKY & WALKER LLP
600 Peachtree Street, NE
Suite 2400
Atlanta, Georgia 30308
Attn: Jesse H. Austin, III, Esq.
Fax No. (404) 815-2424
The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other. All
notices or demands sent in accordance with this Section 12, other than notices
by Foothill in connection with Sections 11-9-504 or 11-9-505 of the Code, shall
be deemed received on the earlier of the date of actual receipt or three (3)
days after the deposit thereof in the mail. Borrower acknowledges and agrees
that notices sent by Foothill in connection with Sections 11-9-504 or 11-9-505
of the Code shall be deemed sent when deposited in the mail or personally
delivered, or, where permitted by law, transmitted telefacsimile or other
similar method set forth above,
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT), THE CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE
PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR
THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA. THE PARTIES
AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT
AND THE OTHER LOAN DOCUMETNTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND
FEDERAL COURTS LOCATED IN THE COUNTY OF FULTON, STATE OF GEORGIA OR, AT THE SOLE
OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN
47.
<PAGE>
CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON
CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 13. TO THE EXTENT PERMITTED BY APPLICABLE LAW,
BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED
THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers delivered to
Foothill may be destroyed or otherwise disposed of by Foothill four (4) months
after they are delivered to or received by Foothill, unless Borrower requests,
in writing, the return of said documents, schedules, or other papers and makes
arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and Foothill.
15.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and assigns of each of the parties;
provided however, that Borrower may not assign this Agreement or any rights or
duties hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Foothill
shall release Borrower from its Obligations. Foothill may assign this Agreement
and its rights and duties hereunder to an Affiliate of Foothill or in connection
with a bulk sale of its portfolio of financial accommodations and no consent or
approval by Borrower is required in connection with any such assignment. No
other assignment (except as set forth in the next sentence) by Foothill, shall
be permitted without the consent of Borrower, which consent shall not be
unreasonably withheld or delayed. Foothill reserves the right to sell syndicated
interests in and/or grant participations in all or any part of, or in any
interest in Foothill's rights and benefits hereunder. In connection with any
such assignment, sale of a syndicated interest or participation, Foothill may
disclose all documents and information which Foothill now or hereafter may have
relating to Borrower or Borrower's business. To the extent that Foothill assigns
its rights and obligations hereunder to a third Person, Foothill thereafter
shall be released from such assigned obligations to Borrower and such assignment
shall effect a novation between Borrower and such third Person.
48.
<PAGE>
15.3 SECTION HEADINGS. Headings and numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
15.4 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Foothill or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
15.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
15.6 AMENDMENTS IN WRITING. This Agreement can only be amended by a
Writing signed by both Foothill and Borrower.
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or
payment of the Obligations by Borrower or any guarantor of the Obligations or
the transfer by either or both of such parties to Foothill of any property of
either or both of such parties should for any reason subsequently be declared to
be void or voidable under any state or federal law relating to creditors'
rights, including provisions of the Bankruptcy Code relating to fraudulent
conveyances, preferences, and other voidable or recoverable payments of money or
transfers of property (collectively, a "Voidable Transfer"), and if Foothill is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs, expenses, and
attorney's fees of Foothill related thereto, the liability of Borrower or such
guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.
15.9 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
15.10 TIME OF THE ESSENCE. Time is of the essence of this Agreement.
49.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal in Atlanta, Georgia.
CORTELCO SYSTEMS, INC.,
a Delaware corporation
By: /s/
-------------------------
Name:_______________________
Title:______________________
Attest: /s/
---------------------
Name:_______________________
Title:______________________
(SEAL)
FOOTHILL CAPITAL CORPORATION,
a California corporation, with
an office in Atlanta, Georgia
By: /s/
-------------------------
Name:_______________________
Title:______________________
50.
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
FOOTHILL NAME OF AMOUNT OF
-------- ------- ---------
FACILITY STATE AND LIEN PRIOR PRIOR
- -------- --------- ---- ----- -----
NAME ADDRESS CITY COUNTY ZIP CODE POSITION LIENOR LIEN
- ---- ------- ---- ------ -------- -------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
===================================================================================================
</TABLE>
<PAGE>
Exhibit 10.2
THIS CONVERTIBLE SUBORDINATED NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN
COMPLIANCE WITH RULE 144 UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A
NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
CONVERTIBLE SUBORDINATED NOTE
$3,000,000.00 July 31, 1997
San Francisco, California
FOR VALUE RECEIVED, CORTELCO SYSTEMS, INC., a Delaware corporation
("Borrower"), hereby promises to pay to CHINAVEST IV, L.P. or its assigns
("Holder"), in lawful money of the United States of America and in immediately
available funds, the principal sum of Three Million Dollars ($3,000,000.00) (the
"Loan"), together with accrued and unpaid interest thereon, payable on the date
and in the manner set forth below. This note (the "Note") is issued pursuant to
that certain Convertible Note Purchase Agreement, dated as of July 31, 1997, by
and between Borrower and Holder (the "Purchase Agreement"). Borrower, Holder,
ChinaVest IV-A, L.P. and ChinaVest IV-B, L.P. agree that if and when this Note
is converted into Series A Preferred Stock any issuance of Series A Preferred
Stock shall be made to Holder, ChinaVest IV-A, L.P. and ChinaVest IV-B, L.P.
such that they receive 86%, 9.9% and 4.1%, respectively, of such stock issuance.
Capitalized terms not otherwise defined herein, shall have the meanings set
forth in the Purchase Agreement.
1. PRINCIPAL REPAYMENT. Subject to Section 5 hereof, the outstanding
principal amount of the Loan shall be due and payable on July 31, 2002 (the
"Maturity Date"), subject to optional conversion to equity as set forth below.
Borrower shall not repay all or any part of the Loan more than 10 days prior to
the Maturity Date without the written consent of Holder.
2. INTEREST RATE. Subject to Section 5 hereof, Borrower further promises
to pay interest on the outstanding principal amount hereof from the date hereof
until payment in full, which interest shall be payable at the rate of eight
percent (8.0%) per annum simple interest or the maximum rate permissible by law,
whichever is less. Subject to earlier conversion, interest shall be payable on
the Maturity Date and shall be calculated on the basis of a 365-day year for the
actual number of days elapsed with annual compounding. If the Note is converted
in whole or in part prior to the Maturity Date, subject to Section 5 hereof, all
interest accrued thereon shall be due and payable within 60 days after the date
of such conversion.
<PAGE>
3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable at
the office of Holder, c/o ChinaVest Limited, 19/F, Dina House, 11 Duddell
Street, Central, Hong Kong, unless another place of payment shall be specified
in writing by Holder.
4. APPLICATION OF PAYMENTS. Subject to the provisions of Sections 1, 2
and 5 hereof, payments on this Note shall be applied first to accrued interest,
and thereafter to the outstanding principal balance hereof.
5. LIMITATIONS ON PAYMENTS. Notwithstanding any other provision of this
Note, prior to the payment in full by Cortelco Systems Holding Corp. ("CSHC") of
all principal, interest and other amounts due pursuant to that certain
Promissory Note dated December 16, 1993 in the original principal amount of
Eight Million Dollars ($8,000,000), as amended, from CSHC in favor of Alcatel
Network Systems, Inc. ("Alcatel"), the Borrower shall not make any payment of
principal, interest or any other amount due pursuant to this Note, whether in
cash, property, debt or other consideration. In the event of any liquidation,
dissolution or winding up of the Borrower, to the extent that the CSHC Note has
not been paid in full and such CSHC Note is secured by a security interest in
common stock of the Borrower, the pledgee or secured party holding (directly or
through any agent or bailee) such common stock shall be entitled to receive any
distribution of the assets and surplus funds of the Borrower prior to any
distribution or payment to the Holder with respect to this Note. In the event
that any payment or distribution of any kind or nature is made to the Holder in
violation of the provisions of this Section 5, such payment or distribution
shall be deemed to be held in trust by the Holder for the benefit of Alcatel or
any subsequent holder of the CSHC Note, as the case may be, and the Holder shall
upon demand remit such payment to Alcatel or such holder, as the case may be.
Notwithstanding any other provisions of this Note, until the payment in full by
CSHC of all principal, interest and other amounts due under the CSHC Note, the
Borrower and the Holder shall not, without the prior written consent of the
holder of the CSHC Note, amend, modify alter or repeal this Section 5 or the
rights of the holder of the CSHC Note hereunder. The provisions of this Section
5 are for the benefit of the holder of the CSHC Note, and such holder shall have
the right to enforce such provisions through the use of all available remedies
at law or at equity. The provisions of this Section 5 shall automatically
terminate on the Maturity Date if as of such date (i) Alcatel has voluntarily
entered into an extension of the terms of the CSHC Note beyond the Maturity
Date, or (ii) Alcatel has failed to commence commercially reasonable steps to
collect any outstanding amounts payable pursuant to the CSHC Note.
6. OPTIONAL CONVERSION. Holder has the right, at Holder's option, at any
time after July 31, 1998 and prior to payment in full of the principal balance
of this Note, to convert this Note, in accordance with the provisions of this
Section 6, in whole or in part, into that number of fully paid and nonassessable
shares of Series A Preferred Stock of the Company equal to the amount of
principal of the Note to be converted into shares of Series A Preferred Stock
divided
2
<PAGE>
by the Series A Conversion Price (as defined below). The "Series A Conversion
Price" shall be computed using the following formula:
X = Y
------------
34,141,483
Where X = the Series A Conversion Price, and
Y = 8 multiplied by the Corporation's audited
net income for the twelve (12) month period ending July 31, 1998.
Notwithstanding the foregoing or any other provisions in this Note, Holder
shall not be permitted to convert this Note into more than an aggregate of
14,632,062 shares of Series A Preferred Stock; and, if Holder converts this Note
in full, Holder shall be entitled to receive upon such conversion a minimum (in
the aggregate) of 5,121,222 shares of Series A Preferred Stock.
No fractional shares of Series A Preferred Stock shall be issued upon
conversion of this Note. In lieu of any fractional shares to which Holder would
otherwise be entitled, Borrower shall pay the cash value of that fractional
share, calculated on the basis of the price of one share of Series A Preferred
Stock.
Before Holder shall be entitled to convert this Note or a portion of this
Note into shares of Series A Preferred Stock pursuant to this Section 6, it
shall surrender the Note, duly endorsed, at the principal offices of Borrower
together with a written notice ("Conversion Notice") to Borrower of its election
to convert. Such Conversion Notice shall indicate the amount of unpaid
principal of this Note that Holder elects to convert into Series A Preferred
Stock. At its expense, Borrower shall, as soon as practicable thereafter, issue
and deliver to Holder at such principal office, a certificate or certificates
for the number of shares of Series A Preferred Stock to which Holder shall be
entitled upon such conversion (bearing such legends as may be required by this
Note and applicable state and federal securities laws in the opinion of legal
counsel for Borrower), together with a check payable to Holder for any cash
amounts payable as described above as a result of a conversion into fractional
shares of Series A Preferred Stock, and, if less than the entire remaining
unpaid principal amount of this Note is being converted, a new Note, of like
tenor and date, representing the unpaid principal amount of this Note after such
conversion. In the event of any conversion of a Note pursuant to this Section,
such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender and delivery of both such Note and the
corresponding Conversion Notice, and Holder shall be entitled to receive the
shares of Series A Preferred Stock issuable upon such conversion and shall be
treated for all purposes as the record holder of such shares of Series A
Preferred Stock on such date. Subject to Section 5 hereof, upon each conversion
of any Note pursuant to this Section 6 (whether partial or full), Borrower shall
pay to Holder thereof accrued but unpaid interest on the principal amount
converted to and including the date of conversion and shall be forever released
from its obligation to pay the principal amount so converted. Upon the
conversion of the entire unpaid principal amount of this Note, or any Note
issued in replacement thereof, Borrower shall be forever released from all its
obligations and liabilities under such Note, except for its obligation to pay
all interest accrued and unpaid under such Note to and including the date of
such conversion.
3
<PAGE>
7. SUBORDINATION. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all Borrower's Senior
Indebtedness, as hereinafter defined. As used in this Note, the term "Senior
Indebtedness" shall mean (i) all indebtedness of Borrower or with respect to
which Borrower is a guarantor, whether outstanding on the date hereof or
hereafter created or incurred, to banks, which is for money borrowed by Borrower
or a subsidiary of Borrower, whether or not secured, and (ii) any deferrals,
renewals or extensions of any such indebtedness or any note, notes or other
evidence of indebtedness issued in exchange for such Senior Indebtedness. In
the event of any conflict between this Section 7 and Section 5 hereof, the
provisions of Section 5 shall control.
If there should occur any receivership, insolvency, assignment for the
benefit of creditors, bankruptcy, reorganization, or arrangements with creditors
(whether or not pursuant to bankruptcy or other insolvency laws), sale of all or
substantially all of the assets, dissolution, liquidation, or any other
marshalling of the assets and liabilities of Borrower or if this Note should be
declared due and payable upon the occurrence of an event of default with respect
to any Senior Indebtedness, then (i) no amount shall be paid by Borrower in
respect of the principal of or interest on this Note at the time outstanding,
unless and until the Senior Indebtedness then outstanding shall be paid in full,
and (ii) no claim or proof of claim shall be filed with Borrower by or on behalf
of Holder that shall assert any right to receive any payments in respect of the
principal of and interest on this Note, except subject to the payment in full of
the Senior Indebtedness then outstanding. If there occurs an event of default
which has been declared in writing with respect to any Senior Indebtedness, or
in the instrument under which any Senior Indebtedness is outstanding, permitting
the holder of such Senior Indebtedness to accelerate the maturity thereof, then,
unless and until such event of default shall have been cured or waived or shall
have ceased to exist, or all Senior Indebtedness shall have been paid in full,
no payment shall be made in respect of the principal of or interest on this
Note. In the event that any payment is made in violation of the prohibition
contained in the preceding sentence, Holder shall pay over such amount to a
holder of Senior Indebtedness within fifteen days of demand by such holder of
Senior Indebtedness.
Subject to the rights, if any, of the holders of Senior Indebtedness under
this Section 7 to receive cash, securities and other properties otherwise
payable or deliverable to the Holder, and subject to the provisions of Section 5
hereof, nothing contained in this Section 7 shall impair, as between Borrower
and Holder, the obligation of Borrower, which is absolute and unconditional, to
pay to Holder the principal thereof and interest thereon as and when the same
become due and payable, or shall prevent Holder, upon default under this Note,
from exercising all rights, powers and remedies otherwise provided herein or
therein or by applicable laws.
8. REPLACEMENT. Borrower shall issue a new note in place of this Note or
any other previously issued note alleged to have been lost, stolen or destroyed,
upon such terms and conditions as Borrower's Board of Directors may prescribe,
including the presentation of reasonable evidence of such loss, theft or
destruction (provided that an affidavit of a holder will be satisfactory for
such purpose) and the giving of such indemnity as Borrower's Board of Directors
may request for the protection of Borrower or any transfer agent or registrar.
Upon surrender of any previously issued note that has been mutilated, Borrower
shall issue a new note in place thereof.
4
<PAGE>
9. DEFAULT. In the event of default hereunder, Borrower shall pay all
reasonable attorneys' fees and court costs incurred by Holder in enforcing and
collecting this Note.
10. WAIVER; REPRESENTATIONS. Presentment for payment, demand, notice of
dishonor, protest, notice of protest, stay of execution and all other defenses
to payment generally and notices in connection with the delivery, acceptance,
performance, default or enforcement of the payment of this Note are hereby
waived by Borrower and its successors and assigns.
11. WAIVERS AND AMENDMENTS. Neither this Note nor any provision hereof
may be changed, waived, discharged, terminated, modified or amended except upon
the written consent of Borrower and Holder.
12. HEADINGS. The headings of the various sections of this Note have been
inserted for convenience of reference only and shall not be deemed to be part of
this Note.
13. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of California as applied to contracts
entered into and performed entirely in California by California residents,
without regard to conflicts of law principles.
14. ENTIRE AGREEMENT. This Note, the Purchase Agreement and other
documents delivered pursuant thereto, including the exhibits, constitute the
full and entire understanding and agreement between the parties with regard to
the subjects hereof and thereof.
15. PAYMENT OF FEES AND EXPENSES. If any action at law or in equity is
necessary to enforce or interpret the terms of this Note, the prevailing party
shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
5
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered as of the date first written above.
CORTELCO SYSTEMS, INC.
/s/
Stephen R. Bowling
President
Agreed to and accepted:
CHINAVEST IV, L.P.
By: /s/
-------------------------
Print Name:_________________
Title:______________________
CHINAVEST IV-A, L.P.
By: /s/
-------------------------
Print Name:_________________
Title:______________________
CHINAVEST IV-B, L.P.
By: /s/
-------------------------
Print Name:_________________
Title:______________________
6
<PAGE>
Exhibit 10.3
PROMISSORY NOTE
Principal amount: $3,184,000 Date: July 31, 1997
On or before December 31, 2002, for value received and subject to the
subordination provisions set forth below, the undersigned ("Maker") promises to
pay to Cortelco Systems, Inc. ("Payee"), at 4119 Willow Lake Boulevard, Memphis,
Tennessee 38118, or such other place as the holder of this Note ("Holder") may
from time to time designate in writing, the principal sum of $3,114,000 with
interest on the unpaid principal balance of this Note at the rate set forth
below, from the date of this Note until this note is paid in full.
Definitions. (A) "Junior Debt" means the principal amount ($3,184,000)
-----------
evidenced by this Note, together with all interest and any other amounts payable
hereunder.
(B) "Senior Debt" means all amounts, loans, liabilities, obligations,
covenants and duties at any time, now or hereafter, owed or payable by Maker to
Alcatel Network Systems, Inc. ("Alcatel"), together with all interest thereon,
under that certain promissory note dated December 16, 1993, as amended, in the
original principal amount of Eight Million Dollars ($8,000,000) and executed by
Maker as the maker, and under that certain CSHC Pledge Agreement dated as of the
16/th/ day of December, 1993, as amended, and executed by Maker as pledgor, and
under that certain New Pledge Agreement dated as of the 23/rd/ day of August,
1993 and executed by Maker as pledgor.
Subordination. To the extent and in the manner provided in this Note,
-------------
payment of any principal of, interest on, or other amounts with respect to the
Junior Debt is postponed and subordinated to the full and final payment and
discharge of all of the Senior Debt. Without limiting the generality of the
foregoing, in the event of any distribution, division or application, partial or
complete, voluntary or involuntary, by operation of law or otherwise, of all or
any part of the assets of the Maker or the proceeds thereof to creditors of
Maker or upon any indebtedness of Maker, by reason of the liquidation,
dissolution or other winding up of Maker or Maker's business, or in the event of
any sale, receivership, insolvency or bankruptcy proceeding by or against Maker,
or assignment for the benefit of creditors of Maker, or any proceeding by or
against Maker for any relief under any bankruptcy or insolvency law or laws
relating to the relief of debtors, readjustment of indebtedness, reorganization,
compositions or extensions, then and in any such event any payment or
distribution of any kind or character, either in cash, securities or other
property, which shall be payable or deliverable upon or with respect to any of
the Junior Debt shall be paid or delivered directly to Alcatel for application
to the Senior Debt (whether or not the same is then due) until all of the Senior
Debt has been fully paid and discharged. The books of Payee and Maker shall be
marked to evidence the subordination of all of the Junior Debt to the Senior
Debt.
Negative Covenants. Without Alcatel's prior written consent (which may be
------------------
given or withheld in Alcatel's sole and unrestricted discretion), until all of
the Senior Debt has been fully and finally paid:
1.
<PAGE>
(A) Maker shall not (and shall not permit any of its direct or indirect
subsidiaries to), directly or indirectly, make any payment on account of the
Junior Debt;
(B) Payee shall not demand, collect or accept from Maker or any other person
any payment on account of the Junior Debt or any part thereof or realize upon or
enforce any collateral securing the Junior Debt;
(C) Payee shall not exchange, extend the time of payment of, compromise, set
off or otherwise discharge any part of the Junior Debt;
(D) Payee shall not hereafter give any subordination in respect of the Junior
Debt, convert any or all of the Junior Debt to capital stock or other securities
of Maker, or transfer or assign any of the Junior Debt to any person other than
Alcatel;
(E) Maker will not hereafter issue any instrument, security or other writing
evidencing any part of the Junior Debt, and Payee will not receive any such
writing, except upon the prior written approval of Alcatel or at the request of
and in the manner requested by Alcatel;
(F) Payee will not commence or join with any other creditors of Maker in
commencing any bankruptcy, reorganization, receivership or insolvency proceeding
against Maker;
(G) Neither the Maker nor the Payee shall amend or modify any of the terms or
provisions hereof; and
(H) Neither the Maker nor the Payee otherwise shall take or permit any action
prejudicial to or inconsistent with Alcatel's priority position over Payee that
is created by this Note.
Turnover of Prohibited Assets. If any payment, distribution or security or
-----------------------------
the proceeds thereof are received by Payee on account of or with respect to the
Junior Debt, Payee shall forthwith deliver the same to Alcatel in the form
received (except for the addition of any endorsement or assignment necessary to
effect a transfer of all rights therein to Alcatel) for application to the
Senior Debt (whether or not the same is then due). Until so delivered any such
payment, distribution, security or proceeds shall be held by Payee in trust for
Alcatel and shall not be commingled with other funds or property of Payee.
Waivers. Maker and Payee each hereby waives any defense based on the
-------
adequacy of a remedy at law which might be asserted as a bar to the remedy of
specific performance of this Note in any action brought therefor by Alcatel. To
the fullest extent permitted by law, Maker and Payee each hereby further waives:
presentment, demand, protest, notice of protest, notice of default or dishonor,
notice of payment or nonpayment and any and all other notices and demands of any
kind in connection with all negotiable instruments evidencing all or any potion
of the Senior Debt or the Junior Debt to which Maker or Payee may be party; any
right to require Alcatel to marshal any securities, or to enforce any security
interest or lien it may now or hereafter have in any collateral securing the
Senior Debt or to pursue any claim it may have against any guarantor of the
Senior Debt, as a condition to Alcatel's entitlement to receive any payment on
account of the Junior Debt; notice of any loans made, extensions granted or
other
2.
<PAGE>
action taken in reliance hereon; and all other demands and notices of every kind
in connection with this Note or the Senior Debt. Payee assents to any renewal,
extension, compromise or postponement of the time of payment of the Senior Debt,
to any substitution, exchange or release of collateral therefor and to the
addition or release of any person or primarily or secondarily liable thereon.
Validity of Junior Debt. The provisions of this Note subordinating the
-----------------------
Junior Debt are solely for the purpose of defining the relative rights of
Alcatel and Payee, and shall not impair as between Payee and Maker, the
obligation of Maker, which is unconditional and absolute, to pay the Junior
Debt, nor shall any such provisions prevent Payee from exercising all remedies
otherwise permitted by applicable law or under any instrument or agreement
evidencing the Junior Debt upon a default thereunder, subject to all rights of
Alcatel hereunder including, without limitation, Alcatel's right to receive
cash, property or securities otherwise payable or deliverable to Payee until the
Senior Debt is paid in full.
Duration and Termination. The subordination provisions of this Note shall
------------------------
constitute a continuing agreement of subordination, and shall remain in full
force and effect until all of the Senior Debt has been fully and finally paid.
Successors and Assigns. This Note shall inure to the benefit of, and be
----------------------
enforceable by, Alcatel, its successors and assigns, and shall be binding upon,
and enforceable against, Maker, Payee and their respective successors and
assigns, provided that neither Maker nor Payee shall have the right to assign
any rights or obligations hereunder without the consent of Alcatel (which may be
given or withheld in Alcatel's sole and unrestricted discretion).
Interest. Interest shall accrue on the indebtedness evidenced by this Note
--------
only on the amounts outstanding hereunder at the rate of eight percent (8.0%)
per annum simple interest or the maximum rate permissible by law, whichever is
less. Accrued interest shall be computed on the basis of a 365-day year, based
on the actual number of days elapsed.
Payments. Principal and interest shall be payable in two (2) consecutive
--------
annual installments beginning with a payment of one (1) million dollars due one-
hundred eighty (180) days after the Maker has made the final payment on the
Senior Debt, together with a second annual payment in an amount equal to all
sums remaining unpaid under this Note. Each payment shall be credited first to
accrued interest, then to unpaid principal, and interest shall then cease on the
portion of principal credited. All payments shall be made in lawful money of
the United States, without offset, deduction or counterclaim of any kind.
Prepayment. Maker may prepay this Note, subject to the subordination
----------
provisions herein, in whole or in part, on any date, without premium or penalty.
Any partial payment shall be credited first to accrued interest, then to
principal. Prepayments shall then be applied to the next principal payment that
becomes due.
No delay or omission by Payee in exercising any right or remedy under this
Note shall operate as a waiver of the future exercise of that right or remedy or
of any other rights or remedies under this Note. To the extent permitted by
law, Maker waives the right, in any action on this Note, to assert that the
action was not commenced within the time required by law for
3.
<PAGE>
commencement of the action. All rights of Holder stated in this Note are
cumulative and in addition to all other rights provided by law or in equity.
Maker: CORTELCO SYSTEMS HOLDING CORP.
By: /s/
-------------------------------
Title:_____________________________
Payee acknowledges its obligation under this Note and agrees that any such
obligations in favor of, or for the benefit of, Alcatel may be enforced by
Alcatel against Payee.
Payee: CORTELCO SYSTEMS, INC.
By: /s/
-------------------------------
Title:_____________________________
4.
<PAGE>
EXHIBIT 10.4
PROMISSORY NOTE
$132,000.00 Memphis, Tennessee
November 11, 1997
FOR VALUE RECEIVED, the undersigned, JAMES M. O'DELL, (the "Maker"),
promises to pay to the order of CORTELCO SYSTEMS, INC. (the "Lender"), the
principal sum of One Hundred Thirty Two Thousand and 00/100 Dollars
($132,000.00), together with interest as set out below.
Said principal shall be due in two equal installments, the first, for one
half of the outstanding principal due on the first anniversary date of this Note
and the second for the remaining outstanding principal, due on the second
anniversary date of this Note. In the event that this Note is paid pursuant to
the preceding sentence, this Note will be non interest hearing. In the event
that this Note is not paid in compliance with the foregoing, the Lender shall
have the right to demand payment in full of all outstanding principal, with
interest from the date hereof to the date of payment, at the maximum effective
contract rate of interest which the Lender may lawfully charge under applicable
statutes and laws in effect at the time of such demand.
In the event that the Maker shall at any time not be an employee of the
Lender, the Lender shall have the right to demand payment of this Note, which
shall include all principal, fees and expenses and interest loss associated
herewith.
Any payment not made when due and, in the event of the acceleration of the
indebtedness evidenced hereby by reason of the Maker's default, the entire
unpaid principal balance hereof, shall bear interest after maturity at the
maximum effective contract rate of interest which the Lender may lawfully charge
under applicable statutes and laws in effect at the time of any such default.
All installments of both principal and interest on this Note are payable at
4119 Willow Lake Boulevard, Memphis, Tennessee 38118, or at such other place as
the holder may designate in writing, in lawful money of the United States of
America, which shall be legal tender in payment of all debts and dues, public
and private, at the time of payment.
If the Maker shall fail to make payment of any installment of principal of
interest, or any part thereof as above provided, or upon any default in the
terms and provisions of any trust deed, mortgage, security agreement,
assignment, or other instrument of pledge or hypothecation which now or
hereafter secures the payment of the indebtedness evidenced hereby, then and in
any of such events, the entire unpaid principal balance of the indebtedness
evidenced hereby, together with all interest then accrued, shall, at the
absolute option of the Lender, at once become due and payable, without demand or
notice, the same being expressly waived.
1.
<PAGE>
If this Note is placed in the hands of an attorney, for collection by suit
or otherwise, or to protect the security for its payment, or to enforce its
collection, or to represent the rights of the Lender in connection with any loan
documentation executed in connection herewith, or to defend successfully against
any claim, cause of action or suit brought by the Maker against the Lender, the
Maker shall pay on demand all costs of collection and litigation (including
court costs), together with a reasonable attorney's fee.
The Maker and any endorsers or guarantors hereof waive protest, demand,
presentment and notice of dishonor, and agree that this Note may be extended, in
whole or in part, without limit as to the number of such extensions, or the
period or periods thereof, and without notice to them and without affecting
their liability thereon.
The privilege is reserved and given to make additional payments on the
principal of this Note, without penalty, at any time.
If the Maker shall at any time not be an employee of the Lender, Lender
shall have the right of appropriation or set off of any moneys, accounts or
credits owed by the Lender to Maker or property of Maker in Lender's possession.
It is the intention of the Lender and the Maker to comply strictly with all
applicable usury laws; and, accordingly, in no event and upon no contingency
shall the Lender ever be entitled to receive, collect, or apply as interest any
interest, fees, charges, or other payments equivalent to interest, in excess of
the maximum rate which the Lender may lawfully charge under applicable statutes
and laws from time to time in effect, and, in the event that the holder hereof
ever receives, collects, or applies as interest, any such excess, such amount
which, but for this provision, would be excessive interest, shall be applied to
the reduction of the principal amount of the indebtedness evidenced hereby, and,
if the principal amount of the indebtedness evidenced hereby, and all lawful
interest thereon, is paid in full, any remaining excess shall forthwith be paid
to the Maker, or other party lawfully entitled thereto. All interest paid or
agreed to be paid by the Maker shall, to the maximum extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the full
period until payment in full of the principal, so that the interest hereon for
such full period shall not exceed the maximum amount permitted by applicable
law. Any provision hereof, or of any other agreement between the Lender and the
Maker, that operates to bind, obligate, or compel the Maker to pay interest in
excess of such maximum lawful contract rate shall be construed to require the
payment of the maximum rate only. The provisions of this paragraph shall be
given precedence over any other provision contained herein or in any other
agreement between the Lender and the Maker that is in conflict with the
provisions of this paragraph.
2.
<PAGE>
This Note is shall governed and construed according to the internal
statutes and laws of the State of Tennessee, without reference to any conflicts
of law principles.
/s/ James M. O'Dell
-----------------------
JAMES M. O'DELL
3.
<PAGE>
EXHIBIT 10.5
ASSUMPTION AGREEMENT
THIS ASSUMPTION AGREEMENT, dated as of April 12, 1999, is made by
Cortelco Systems Puerto Rico, Inc., a Puerto Rico corporation ("CSPRI"), in
favor of FOOTHILL CAPITAL CORPORATION (the "Lender").
W I T N E S S E T H:
WHEREAS, the Lender is party to that certain Loan and Security
Agreement dated as of August 28, 1997 (as amended, restated, supplemented or
otherwise modified from time to time, the "Loan Agreement") by and between
Cortelco Puerto Rico, Inc., a Puerto Rico corporation ("CPR") and the Lender;
and
WHEREAS, CSPRI is a wholly-owned subsidiary of CPR and the extension
of credit to CPR under the Loan Agreement is of direct benefit to CSPRI; and
WHEREAS, as a condition to Lender's continued extension of credit
under the Loan Agreement, Lender has required that CSPRI execute and deliver
this Assumption Agreement;
ACCORDINGLY, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, CSPRI hereby agrees that all capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Loan Agreement), and further agrees as follows:
1. Assumption.
----------
a. CSPRI hereby unconditionally and expressly assumes the due and
punctual payment of the principal of and interest on all of the Loans and the
due and punctual performance of all Obligations of the "Borrower" under the Loan
Agreement and the other Loan Documents and hereby agrees that, immediately upon
its execution of this Agreement, it will become a joint and several obligor
under the Loan Agreement and the other Loan Documents and will perform and
observe each and every one of the covenants, promises, agreements, terms,
conditions, obligations, duties and liabilities of the "Borrower" under and in
respect of the Loan Agreement and the other Loan Documents.
b. All references to the "Borrower" in the Loan Agreement and each
other Loan Document, or any document, instrument or agreement executed and
delivered or furnished, or to be executed and delivered or furnished, in
connection therewith shall be deemed to include CSPRI unless the context
otherwise clearly requires.
2. Representations and Warranties. CSPRI hereby accepts and restates
------------------------------
each representation and warranty made by the "Borrower" in the Loan Agreement
and the other Loan Documents (other than those representations and warranties
made by CPR in the Loan Agreement which are intended to relate solely to CPR).
CSPRI further represents and warrants to the Lender that each of the
representations and warranties contained in Loan Agreement (other than those
representations and warranties made by CPR in the Loan Agreement which are
intended to relate solely to Borrower) is true and correct with respect to CSPRI
on and as of the date thereof, except to the extent
1
<PAGE>
each such representation and warranty (a) relates expressly to an earlier date,
(b) was previously fulfilled in accordance with the terms of the Loan Agreement
or (c) has subsequently become inapplicable. Each such representation and
warranty is incorporated by reference herein in its entirety.
3. Further Assurances. At any time and from time to time, upon the
------------------
request of the Lender, and at the sole expense of CSPRI, CSPRI will promptly
execute and deliver any and all further instruments and documents and will take
such further action as Lender may reasonably deem necessary to effect the
purposes of this Assumption Agreement.
4. Amendment. No amendment or waiver of any provision of this Assumption
----------
Agreement shall be effective, unless the same shall be in writing and executed
in accordance with the provisions of the Loan Agreement.
5. Binding Effect. This Assumption Agreement shall be binding upon CSPRI
--------------
and shall inure to the benefit of the Lender, and its respective successors and
assigns.
6. Governing Law. This Assumption Agreement shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of Puerto Rico.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Assumption
Agreement to be duly executed and delivered by its duly authorized officer on
the date first above written.
CORTELCO SYSTEMS PUERTO RICO, INC.
By: /s/ Sergio Moren
_______________________________________________
Name: /s/ Sergio Moren
____________________________________________
Title: VP/General Manager
____________________________________________
Attest: /s/
___________________________________________
Name:____________________________________________
Title: __________________________________________
(SEAL)
Acknowledged and agreed to:
CORTELCO PUERTO RICO, INC.,
By: /s/ Francisco Sanchez
_________________________________
Name: Francisco Sanchez
______________________________
Title: VP/Treasurer
______________________________
3
<PAGE>
EXHIBIT 10.5
================================================================================
$1,500,000
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
CORTELCO PUERTO RICO, INC.
AND
FOOTHILL CAPITAL CORPORATION
DATED AS OF AUGUST 28, 1997
================================================================================
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
1. DEFINITIONS AND CONSTRUCTION.................................................. -1-
1.1 Definitions............................................................. -1-
1.2 Accounting Terms........................................................ -17-
1.3 Construction............................................................ -17-
1.4 Schedules and Exhibits.................................................. -18-
2. LOAN AND TERMS OF PAYMENT .................................................... -18-
2.1 Revolving Advances...................................................... -18-
2.2 Letters of Credit....................................................... -19-
2.3 Overadvances............................................................ -19-
2.4 Interest: Rates, Payments, and Calculations; Promise to Pay............ -19-
2.5 Collection of Accounts.................................................. -21-
2.6 Crediting Payments; Application of Collections.......................... -21-
2.7 Designated Account...................................................... -22-
2.8 Maintenance of Loan Account; Statements of Obligations.................. -22-
2.9 Fees.................................................................... -22-
2.10 Tax Indemnity........................................................... -23-
3. CONDITIONS; TERM OF AGREEMENT................................................. -26-
3.1 Conditions Precedent to the Initial Advance............................. -26-
3.2 Conditions Precedent to all Advances.................................... -27-
3.3 Condition Subsequent.................................................... -28-
3.4 Term.................................................................... -28-
3.5 Effect of Termination................................................... -28-
3.6 Early Termination by Borrower........................................... -29-
3.7 Termination Upon Event of Default....................................... -29-
4. CREATION OF SECURITY INTEREST................................................. -29-
4.1 Grant of Security Interest.............................................. -29-
4.2 Negotiable Collateral................................................... -29-
4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral.. -29-
4.4 Delivery of Additional Documentation Required........................... -29-
4.5 Rights of Foothill...................................................... -30-
4.6 Right to Inspect........................................................ -30-
5. REPRESENTATIONS AND WARRANTIES................................................ -31-
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
5.1 No Encumbrances......................................................... -31-
5.2 Eligible Accounts....................................................... -31-
5.3 Eligible Inventory...................................................... -31-
5.4 Equipment............................................................... -31-
5.5 Location of Inventory and Equipment..................................... -31-
5.6 Inventory Records....................................................... -31-
5.7 Location of Chief Executive Office; FEIN................................ -32-
5.8 Due Organization and Qualification; Subsidiaries........................ -32-
5.9 Due Authorization; No Conflict.......................................... -32-
5.10 Litigation.............................................................. -33-
5.11 No Material Adverse Change.............................................. -34-
5.12 Solvency................................................................ -34-
5.13 Employee Benefits....................................................... -34-
5.14 Environmental Condition................................................. -34-
6. AFFIRMATIVE COVENANTS......................................................... -35-
6.1 Accounting System....................................................... -35-
6.2 Collateral Reporting.................................................... -35-
6.3 Financial Statements, Reports, Certificates............................. -36-
6.4 Tax Returns............................................................. -37-
6.5 Intentionally Omitted................................................... -37-
6.6 Returns................................................................. -37-
6.7 Title to Equipment...................................................... -38-
6.8 Maintenance of Equipment................................................ -38-
6.9 Taxes................................................................... -38-
6.10 Insurance............................................................... -38-
6.11 No Setoffs or Counterclaims............................................. -40-
6.12 Location of Inventory and Equipment..................................... -40-
6.13 Compliance with Laws.................................................... -40-
6.14 Employee Benefits....................................................... -40-
6.15 Leases.................................................................. -41-
7. NEGATIVE COVENANTS............................................................ -41-
7.1 Indebtedness............................................................ -42-
7.2 Liens................................................................... -43-
7.3 Restrictions on Fundamental Changes..................................... -43-
7.4 Sale or Disposal of Assets.............................................. -43-
7.5 Change Name............................................................. -43-
7.6 Guarantee............................................................... -43-
7.7 Nature of Business...................................................... -43-
7.8 Repayments, Prepayments and Amendments.................................. -44-
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7.9 Change of Control...................................................... -44-
7.10 Consignments........................................................... -44-
7.11 Distributions.......................................................... -44-
7.12 Accounting Methods..................................................... -45-
7.13 Investments............................................................ -45-
7.14 Transactions with Affiliates........................................... -45-
7.15 Suspension............................................................. -46-
7.16 Compensation........................................................... -46-
7.17 Use of Proceeds........................................................ -46-
7.18 Change in Location of Chief Executive Office; Inventory and Equipment
with Bailees........................................................... -46-
7.19 No Prohibited Transactions Under ERISA................................. -46-
8. EVENTS OF DEFAULT............................................................. -47-
9. FOOTHILL'S RIGHTS AND REMEDIES................................................ -49-
9.1 Rights and Remedies.................................................... -49-
9.2 Remedies Cumulative.................................................... -52-
10. TAXES AND EXPENSES............................................................ -53-
11. WAIVERS; INDEMNIFICATION...................................................... -53-
11.1 Demand; Protest; etc................................................... -53-
11.2 Foothill's Liability for Collateral.................................... -53-
11.3 Indemnification........................................................ -53-
12. NOTICES....................................................................... -54-
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.................................... -56-
14. DESTRUCTION OF BORROWER'S DOCUMENTS........................................... -57-
15. GENERAL PROVISIONS............................................................ -57-
15.1 Effectiveness.......................................................... -57-
15.2 Successors and Assigns................................................. -57-
15.3 Section Headings....................................................... -57-
15.4 Interpretation......................................................... -57-
15.5 Severability of Provisions............................................. -58-
15.6 Amendments in Writing.................................................. -58-
15.7 Counterparts; Telefacsimile Execution.................................. -58-
15.8 Revival and Reinstatement of Obligations............................... -58-
</TABLE>
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<TABLE>
<S> <C>
15.9 Integration............................................................. -58-
15.10 Time of the Essence..................................................... -59-
</TABLE>
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SCHEDULES AND EXHIBITS
----------------------
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule 5.8 Shareholders and Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Indebtedness as of Closing Date
Schedule 7.13 Investments
Exhibit P-1 Projections
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<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of
August 28, 1997, between FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333 and an office located in Atlanta,
Georgia and CORTELCO PUERTO RICO, INC., a corporation organized under the laws
of the Commonwealth of Puerto Rico ("Borrower"), with its chief executive office
located at 1550 Ponce de Leon Avenue, San Juan, Puerto Rico 00926.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Account Debtor" means any Person who is or who may become obligated
under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods or the rendition of services by
Borrower, irrespective of whether earned by performance, and any and all credit
insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section 2.1(a).
"Affiliate" means, as applied to any Person, any other Person who
directly or indirectly controls, is controlled by, is under common control with
or is a director or officer of such Person. For purposes of this definition,
"control" means the possession, directly or indirectly, of the power to vote ten
percent (10%) or more of the securities having ordinary voting power for the
election of directors or the direct or indirect power to direct the management
and policies of a Person.
"Agreement" has the meaning set forth in the preamble hereto.
"Alcatel" means Alcatel Network Systems, Inc., a Delaware corporation.
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"Alcatel Debt" means that Indebtedness owing by Cortelco Systems
Holding Corp. to Alcatel pursuant to that certain Promissory Note dated December
16, 1993, in the original principal amount of $8,000,000.
"Applicable Law" means, in respect of any Person, all provisions of
constitutions, statutes, rules, regulations and orders of governmental bodies or
regulatory agencies applicable to such Person, including, without limiting the
foregoing, all environmental laws, and all orders, decisions, judgments and
decrees of all courts and arbitrators in proceedings or actions to which the
Person in question is a party or by which it is bound.
"Assignment of Accounts Receivable" shall mean that certain Assignment
of Accounts Receivable Agreement executed by Borrower in favor of Foothill of
even date herewith, as the same may be amended, modified or supplemented from
time to time.
"Authorized Person" means any officer or other employee of Borrower.
"Average Unused Portion of Maximum Amount" means, as of any date of
determination, (a) the Maximum Amount, less (b) the average Daily Balance of
Advances that were outstanding during the immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C.
(S) 101 et seq.), as amended, and any successor statute.
"Benefit Plan" means a "defined benefit plan" (as defined in Section
3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA
Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within
the past six years.
"Borrower" has the meaning set forth in the preamble to this
Agreement.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records indicating, summarizing, or evidencing Borrower's
properties or assets (including the Collateral) or liabilities; all information
relating to Borrower's business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs, or other computer
prepared information.
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<PAGE>
"Borrowing Base" has the meaning set forth in Section 2.1(a).
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which national banks are authorized or required to close.
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" other than Parent (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly
or indirectly, of more than ten percent (10%) of the total voting power of all
classes of stock then outstanding of Borrower entitled to vote in the election
of directors.
"Chattel Mortgage" means that certain Personal Property Mortgage
executed by the Borrower in favor of the Lender of even date herewith, as the
same may be amended, supplemented or modified from time to time.
"CII Loan Agreement" means the Loan and Security Agreement entered
into by and between Cortelco International, Inc. and Foothill on July 31, 1997,
as amended or modified from time to time.
"Closing Date" means the date of the making of the initial Advance.
"Code" means the Factor's Lien Act, the Assignment of Accounts
Receivable Act and the Uniform Commercial Code, as in effect from time to time
in the Commonwealth of Puerto Rico.
"Collateral" means all property of Borrower, including each of
the following:
(a) the Accounts;
(b) Borrower's Books;
(c) the Equipment;
(d) the General Intangibles;
(e) the Inventory;
(f) the Investment Property;
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(g) the Negotiable Collateral;
(h) any money, or other assets of Borrower that now or
hereafter come into the possession, custody, or control of Foothill; and
(i) the proceeds and products, whether tangible or intangible,
of any of the foregoing, including proceeds of insurance covering any or all of
the Collateral, and any and all Accounts, Borrower's Books, Equipment, General
Intangibles, Inventory, Investment Property, Negotiable Collateral, money,
deposit accounts, or other tangible or intangible property resulting from the
sale, exchange, collection, or other disposition of any of the foregoing, or any
portion thereof or interest therein, and the proceeds thereof.
"Collateral Access Agreement" means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgment agreement of any warehouseman,
processor, lessor, consignee, or other Person in possession of, having a Lien
upon, or having rights or interests in the Equipment or Inventory, in each case,
in form and substance satisfactory to Foothill.
"Collections" means all cash, checks, notes, instruments, and
other items of payment (including, insurance proceeds, proceeds of cash sales,
rental proceeds, and tax refunds).
"Daily Balance" means the amount of an Obligation owed at the end
of a given day.
"deems itself insecure" means that Foothill in good faith
believes that the prospect of payment or performance by the Borrower is
impaired.
"Default" means an event, condition, or default that, with the
giving of notice, the passage of time, or both, would be an Event of Default.
"Designated Account" means account number 0-300069-029 of
Borrower maintained with Borrower's Designated Account Bank, or such other
deposit account of Borrower (located within the United States) which has been
designated, in writing and from time to time, by Borrower to Foothill.
"Designated Account Bank" means Citibank, N.A., whose office is
located in ______________, and whose ABA number is 021000089.
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<PAGE>
"Dilution" means, in each case based upon the experience of the
immediately prior three (3) months, the result of dividing the Dollar amount of
(a) bad debt write-downs, discounts, advertising, returns, promotions, credits,
or other dilution with respect to the Accounts, by (b) Borrower's Collections
(excluding extraordinary items) plus the Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of determination, an amount
sufficient to reduce Foothill's advance rate against Eligible Accounts by one
percentage point for each percentage point by which Dilution is in excess of
five percent (5.00%).
"Disbursement Letter" means an instructional letter executed and
delivered by Borrower to Foothill regarding the extensions of credit to be made
on the Closing Date, the form and substance of which shall be satisfactory to
Foothill.
"Dollars or $" means United States dollars.
"Eligible Accounts" means, collectively, the Eligible Interconnect
Accounts and the Eligible Cellular Accounts.
"Eligible Cellular Accounts" means those Accounts created by Borrower
in the ordinary course of business (net of finance charges), that arise out of
Borrower's sale of cellular phone equipment and pagers and the resale of air
time relating thereto pursuant to a Reseller Agreement, that strictly comply
with each and all of the representations and warranties respecting Accounts made
by Borrower to Foothill in the Loan Documents, that are and at all times
continue to be reasonably acceptable to Foothill in all respects (provided,
however, that standards of eligibility may be fixed and revised from time to
time by Foothill in Foothill's reasonable credit judgment), and that do not
constitute Excluded Accounts.
"Eligible Interconnect Accounts" means those Accounts created by
Borrower in the ordinary course of business (net of finance charges), that arise
out of Borrower's sale and installation of PBX interconnect telephone systems
and the maintenance of such telephone systems pursuant to a maintenance
contract, that strictly comply with each and all of the representations and
warranties respecting Accounts made by Borrower to Foothill in the Loan
Documents, that are and at all times continue to be reasonably acceptable to
Foothill in all respects (provided, however, that standards of eligibility may
be Fixed and revised from time to time by Foothill in Foothill's reasonable
credit judgment), and that do not constitute Excluded Accounts.
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<PAGE>
"Eligible Inventory" means Inventory consisting of first quality
finished goods held for sale in the ordinary course of Borrower's business that
are located at Borrower's premises identified on Schedule E-1, that strictly
comply with each and all of the representations and warranties respecting
Inventory made by Borrower to Foothill in the Loan Documents, and that are and
at all times continue to be acceptable to Foothill in all respects; provided,
however, that standards of eligibility may be fixed and revised from time to
time by Foothill in Foothill's reasonable credit judgment. In determining the
amount to be so included, Inventory shall be valued at the lower of cost or
market on a basis consistent with GAAP and Borrower's current and historical
accounting practices. An item of Inventory shall not be included in Eligible
Inventory if:
(a) it is not owned solely by Borrower or Borrower does not have
good, valid, and marketable title thereto;
(b) it is not located at one of the locations set forth on Schedule
E-1;
(c) it is not located on property owned or leased by Borrower or in a
contract warehouse, in each case, subject to a Collateral Access Agreement
executed by the mortgagee, lessor, the warehouseman, or other third party, as
the case may be, and segregated or otherwise separately identifiable from goods
of others, if any, stored on the premises;
(d) it is not subject to a valid and perfected first priority
security interest in favor of Foothill;
(e) it does not meet all of Borrower's quality standards or any other
standards imposed by any Person having regulatory authority over such goods;
(f) it consists of goods rejected by Borrower's customers; and
(g) it is obsolete, a restrictive or custom item, work-in-process, a
component that is not part of finished goods, or constitutes spare parts,
packaging and shipping materials, supplies used or consumed in Borrower's
business, Inventory subject to a Lien in favor of any third Person, bill and
hold goods, defective goods, sample Inventory, "seconds," or Inventory acquired
on consignment.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, machine tools, motors, equipment, furniture, furnishings, tools,
parts, goods (other than consumer goods, farm products, or Inventory), wherever
located, including,
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<PAGE>
(a) any interest of Borrower in any of the foregoing, and (b) all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, 29
U.S.C. (S)(S) 1000 et seq., amendments thereto, successor statutes, and
regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject to ERISA whose
employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the employees of Borrower
under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with respect to any Benefit
Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its
Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which
it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c)
the providing of notice of intent to terminate a Benefit Plan in a distress
termination (as described in Section 4041(c) of ERISA), (d) the institution by
the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e)
any event or condition (i) that provides a basis under Section 4042(a)(1), (2),
or (3) of ERISA for the termination of, or the appointment of a trustee to
administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the
partial or complete withdrawal within the meaning of Sections 4203 and 4205 of
ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a
Multiemployer Plan, or (g) providing any security to any Plan under Section
401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA
Affiliates.
"Event of Default" has the meaning set forth in Section 8.
"Excluded Accounts" means the following:
(a) Accounts (i) that the Account Debtor has failed to pay within
sixty (60) days of the due date; or (ii) with selling terms of more than sixty
(60) days;
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<PAGE>
(b) Accounts owed by an Account Debtor or its Affiliates where fifty
percent (50%) or more of all Accounts owed by that Account Debtor (or its
Affiliates) are deemed ineligible under clause (a) above;
(c) Accounts with respect to which the Account Debtor is an employee,
Affiliate or agent of Borrower;
(d) Accounts with respect to which goods are samples or are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(e) Accounts that are not payable in Dollars or with respect to which
the Account Debtor: (i) does not maintain its chief executive office in the
United States or Puerto Rico, or (ii) is not organized under the laws of the
United States or any State thereof or Puerto Rico, or (iii) is the government of
any foreign country or sovereign state, or of any state, province, municipality,
or other political subdivision thereof, or of any department, agency, public
corporation, or other instrumentality thereof, unless (y) the Account is
supported by an irrevocable letter of credit satisfactory to Foothill (as to
form, substance, and issuer or domestic confirming bank) that has been delivered
to Foothill and is directly drawable by Foothill, or (z) the Account is covered
by credit insurance in form and amount, and by an insurer, satisfactory to
Foothill;
(f) Accounts with respect to which the Account Debtor is either (i)
the United States or any department, agency, or instrumentality of the United
States (exclusive, however, of Accounts with respect to which Borrower has
complied, to the satisfaction of Foothill, with the Assignment of Claims Act, 31
U.S.C. (S) 3727), or (ii) any State, territory or commonwealth of the United
States (exclusive, however, of Accounts owed by any State, territory or
commonwealth that does not have a statutory counterpart to the Assignment of
Claims Act), to the extent such accounts described in (i) and (ii) above exceed,
in the aggregate, $250,000;
(g) Accounts with respect to which the Account Debtor is a creditor
of Borrower, has or has asserted a right of setoff, has disputed its liability,
has cancelled its contract with Borrower, or has made any claim with respect to
the Account (to the extent of such claim);
(h) Accounts, to the extent such Accounts, together with all other
Accounts owing by such Account Debtor to Borrower, exceed in the aggregate ten
percent (10%) of all Eligible Accounts of Borrower;
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<PAGE>
(i) Accounts with respect to which the Account Debtor is subject to
any Insolvency Proceeding, or becomes insolvent, or goes out of business;
(j) Accounts the collection of which Foothill, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Accounts with respect to which the goods giving rise to such
Account have not been shipped and billed to the Account Debtor, the services
giving rise to such Account have not been performed and accepted by the Account
Debtor, or the Account otherwise does not represent a final sale;
(l) Accounts with respect to which the Account Debtor is located in
the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana,
West Virginia, or such other states, or has filed a Notice of Business
Activities Report with the applicable division of taxation, the department of
revenue, or with such other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement; and
(m) Accounts that represent progress payments, deposits or other
advance billings that are due prior to the completion of performance by Borrower
of the subject contract for goods or services.
"Existing Lender" means Citibank, N.A.
"Factor's Lien Agreement" shall mean that certain Factor's Lien
Contract and Assignment of Accounts Receivable executed by Borrower in favor of
Foothill of even date herewith, as the same may be amended, modified or
supplemented from time to time.
"FEIN" means Federal Employer Identification Number.
"First Bank" means FirstBank Puerto Rico.
"First Bank Mortgage" means that certain Deed of Mortgage entered into
between Borrower and First Bank on August 29, 1997, as amended, restated or
supplemented from time to time.
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<PAGE>
"Foothill" has the meaning set forth in the preamble to this
Agreement.
"Foothill Account" has the meaning set forth in Section 2.5.
"Foothill Expenses" means all: reasonable costs or expenses
(including taxes, and insurance premiums) required to be paid by Borrower under
any of the Loan Documents that are paid or incurred by Foothill; reasonable fees
or charges paid or incurred by Foothill in connection with Foothill's
transactions with Borrower, including, fees or charges for photocopying,
notarization, couriers and messengers, telecommunication, public record searches
(including tax lien, litigation, and UCC searches and including searches with
the patent and trademark office, the copyright office, or the department of
motor vehicles), filing, recording, publication, appraisal (including periodic
Collateral appraisals), costs and expenses incurred by Foothill in the
disbursement of funds to Borrower (by wire transfer or otherwise); reasonable
charges paid or incurred by Foothill resulting from the dishonor of checks;
costs and expenses paid or incurred by Foothill to correct any default or
enforce any provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral or any portion thereof, irrespective
of whether a sale is consummated; costs and expenses paid or incurred by
Foothill in examining Borrower's Books; costs and expenses of third party claims
or any other suit paid or incurred by Foothill in enforcing or defending the
Loan Documents or in connection with the transactions contemplated by the Loan
Documents or Foothill's relationship with Borrower or any guarantor; and
Foothill's reasonable attorneys fees and expenses incurred in advising,
structuring, drafting, reviewing, administering, amending, terminating,
enforcing (including attorneys fees and expenses incurred in connection with a
"workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or
any guarantor of the Obligations), defending, or concerning the Loan Documents,
irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
"General Intangibles" means all of Borrower's present and future
general intangibles and other personal property (including Reseller Agreements
(to the extent such assignment is not prohibited by the terms of such Reseller
Agreement) and other contract rights, rights arising under common law, statutes,
or regulations, choses or things in action, goodwill, patents, trade names,
trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders,
customer lists, monies due or recoverable from pension funds, route lists,
rights to payment and other rights under any royalty,
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<PAGE>
distribution or licensing agreements, infringement claims, computer programs,
information contained on computer disks or tapes, literature, reports, catalogs,
deposit accounts, insurance premium rebates, tax refunds, and tax refund
claims), other than goods, Accounts, and Negotiable Collateral.
"Governing Documents" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.
"Hazardous Materials" means (a) substances that are defined or listed
in, or otherwise classified pursuant to, any applicable laws or regulations as
"hazardous substances," "hazardous materials," "hazardous wastes," "toxic
substances," or any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any radioactive materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.
"Indebtedness" means: (a) all obligations of Borrower for borrowed
money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or
other similar instruments and all reimbursement or other obligations of Borrower
in respect of letters of credit, bankers acceptances, interest rate swaps, or
other financial products, (c) all obligations of Borrower under capital leases,
(d) all obligations or liabilities of others secured by a Lien on any property
or asset of Borrower, irrespective of whether such obligation or liability is
assumed, and (e) any obligation of Borrower guaranteeing or intended to
guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with
recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or
other obligation of any other Person.
"Insolvency Proceeding" means any proceeding commenced by or against
any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"Inventory" means all present and future inventory in which Borrower
has any interest, including goods held for sale or lease or to be furnished
under
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<PAGE>
a contract of service and all of Borrower's present and future raw materials,
work in process, finished goods, and packing and shipping materials, wherever
located.
"Inventory Reserves" means reserves (determined from time to time by
Foothill in its reasonable credit judgment) for the estimated reclamation claims
of unpaid sellers of Inventory sold to Borrower.
"Investment Property" means all securities, whether certificated or
uncertificated, all security entitlements, all securities accounts, all
commodity futures contracts, all options on commodity futures contracts, all
commodity options and all commodity accounts, whether now owned or hereafter
acquired by Borrower.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lien" means any interest in property securing an obligation owed to,
or a claim by, any Person other than the owner of the property, whether such
interest shall be based on the common law, statute, or contract, whether such
interest shall be recorded or perfected, and whether such interest shall be
contingent upon the occurrence of some future event or events or the existence
of some future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, adverse
claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"Loan Account" has the meaning set forth in Section 2.8.
"Loan Documents" means this Agreement, the Disbursement Letter, the
Chattel Mortgage, the Factor's Lien Agreement, the Assignment of Accounts
Receivable, the Lockbox Agreements, the Collateral Access Agreements, any
assignment of insurance policies, any note or notes executed by Borrower and
payable to Foothill, and any other agreement entered into, now or in the future,
in connection with this Agreement.
"Lockbox Account" means a depositary account established pursuant to
one of the Lockbox Agreements.
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<PAGE>
"Lockbox Agreements" means those certain Lockbox Operating Procedural
Agreements and those certain Blocked Depository Account Agreements, in form and
substance satisfactory to Foothill, each of which is among Borrower, Foothill,
and one of the Lockbox Banks.
"Lockbox Banks" means Citibank, N.A., and/or such other Person or
Persons as Foothill and Borrower may designate from time to time.
"Lockboxes" has the meaning set forth in Section 2.5.
"Material Adverse Change" means (a) a material adverse change in the
business, prospects, operations, results of operations, assets, liabilities or
condition (financial or otherwise) of Borrower, (b) the material impairment of
Borrower's ability to perform its obligations under the Loan Documents to which
it is a party or of Foothill to enforce the Obligations or realize upon the
Collateral, (c) a material adverse effect on the value of the Collateral or the
amount that Foothill would be likely to receive (after giving consideration to
delays in payment and costs of enforcement) in the liquidation of such
Collateral, or (d) a material impairment of the priority or enforceability of
Foothill's Liens with respect to the Collateral.
"Maturity Date" has the meaning set forth in Section 3.4.
"Maximum Amount" means $1,500,000.
"Multiemployer Plan" means a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any
ERISA Affiliate has contributed, or was obligated to contribute, within the past
six years.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit, notes, drafts, instruments, investment property, security
entitlements, securities (including the shares of stock of Subsidiaries, if any,
of Borrower), documents, personal property leases (wherein Borrower is the
lessor), chattel paper, and Borrower's Books relating to any of the foregoing.
"Obligations" means all (a) loans, Advances, debts, principal,
interest (including any interest that, but for the provisions of the Bankruptcy
Code, would have accrued), premiums, liabilities (including all amounts charged
to Borrower's Loan Account pursuant hereto), obligations, fees, charges, costs,
or Foothill Expenses (including any fees or expenses that, but for the
provisions of the Bankruptcy Code, would have accrued), lease payments,
guaranties, covenants, and duties owing by Borrower to Foothill of any kind and
description (whether pursuant to or evidenced by the Loan
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<PAGE>
Documents or pursuant to any other agreement between Foothill and Borrower, and
irrespective of whether for the payment of money), whether direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter arising,
and including any debt, liability, or obligation owing from Borrower to others
that Foothill may have obtained by assignment or otherwise, and further
including all interest not paid when due and all Foothill Expenses that Borrower
is required to pay or reimburse by the Loan Documents, by law, or otherwise; and
(b) all Obligations (as defined in the CII Loan Agreement) under the CII Loan
Agreement.
"Other Taxes" has the meaning set forth in Section 2.10.
"Overadvance" has the meaning set forth in Section 2.3.
"Parent" means Cortelco Systems Holding Corporation, a Delaware
corporation.
"Parent Note" has the meaning set forth in Section 7.1(f)(iii).
"Pay-Off Letter" means a letter, in form and substance reasonably
satisfactory to Foothill, from Existing Lender respecting the amount necessary
to repay in full all of the obligations of Borrower owing to Existing Lender and
obtain a termination or release of all of the Liens existing in favor of
Existing Lender in and to the properties or assets of Borrower.
"PBGC" means the Pension Benefit Guaranty Corporation as defined in
Title IV of ERISA, or any successor thereto.
"Permitted Liens" means (a) Liens held by Foothill, (b) Liens for
unpaid taxes that either (i) are not yet due and payable or (ii) are the subject
of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of
lessors under operating leases and purchase money Liens of lessors under capital
leases to the extent that the acquisition or lease of the underlying asset is
permitted hereunder and so long as the Lien only attaches to the asset purchased
or acquired and only secures the purchase price of the asset, (e) Liens arising
by operation of law in favor of warehousemen, landlords, carriers, mechanics,
materialmen, laborers, or suppliers, incurred in the ordinary course of business
of Borrower and not in connection with the borrowing of money, and which Liens
either (i) are for sums not yet due and payable, or (ii) are the subject of
Permitted Protests, (f) Liens arising from deposits made in connection with
obtaining worker's compensation or other unemployment insurance, (g) Liens or
deposits to secure performance of bids, tenders, or leases (to the extent
permitted under this Agreement),
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incurred in the ordinary course of business of Borrower and not in connection
with the borrowing of money, (h) Liens arising by reason of security for surety
or appeal bonds in the ordinary course of business of Borrower, (i) Liens of or
resulting from any judgment or award that would not have a Material Adverse
Change and as to which the time for the appeal or petition for rehearing of
which has not yet expired, or in respect of which Borrower is in good faith
prosecuting an appeal or proceeding for a review, and in respect of which a stay
of execution pending such appeal or proceeding for review has been secured, (j)
the Lien of First Bank on the Borrower's Real Property located at 1550 Ponce de
Leon Avenue, San Juan, Puerto Rico (and on the Borrower's Equipment to the
extent such Equipment is permanently attached to such Real Property), pursuant
to the First Bank Mortgage, to the extent such Lien secures Indebtedness
permitted by Section 7.1(g); (k) Liens of First Bank on rents received by the
Borrower, as lessor, in connection with the Borrower's lease of a portion of the
Real Property located at 1550 Ponce de Leon Avenue, San Juan, Puerto Rico; and
(l) with respect to any Real Property, easements, rights of way, zoning and
similar covenants and restrictions, and similar encumbrances that customarily
exist on properties of Persons engaged in similar activities and similarly
situated and that in any event do not materially interfere with or impair the
use or operation of the Collateral by Borrower or the value of Foothill's Lien
thereon or therein, or materially interfere with the ordinary conduct of the
business of Borrower.
"Permitted Protest" means the right of Borrower to protest any Lien
other than any such Lien that secures the Obligations, tax (other than payroll
taxes or taxes that are the subject of a United States federal tax lien), or
rental payment, provided that (a) a reserve with respect to such obligation is
established on the books of Borrower in an amount that is reasonably
satisfactory to Foothill, (b) any such protest is instituted and diligently
prosecuted by Borrower in good faith, and (c) Foothill is satisfied that, while
any such protest is pending, there will be no impairment of the enforceability,
validity, or priority of any of the Liens of Foothill in and to the Collateral.
"Person" means and includes natural persons, corporations, limited
liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"Plan" means any employee benefit plan, program, or arrangement
maintained or contributed to by Borrower or with respect to which it may incur
liability.
"Projections" means those projections [attached hereto as Exhibit P-1
for the fiscal year ending 7/31/98 and such other subsequent projections] of
Borrower's
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financial statements as Foothill may request from time to time, for such periods
and in such form and substance as may be mutually agreed upon by Borrower and
Foothill.
"Real Property" means any estates or interests in real property now
owned or hereafter acquired by Borrower.
"Reference Rate" means the variable rate of interest, per annum, most
recently announced by Norwest Bank Minnesota, National Association, or any
successor thereto, as its "base rate," irrespective of whether such announced
rate is the best rate available from such financial institution.
"Reportable Event" means any of the events described in Section
4043(c) of ERISA or the regulations thereunder other than a Reportable Event as
to which the provision of thirty (30) days notice to the PBGC is waived under
applicable regulations.
"Reseller Agreements" means those certain Reseller Agreements now or
hereafter entered into by the Borrower, as reseller, and CCPR Services, Inc.,
Puerto Rico Telephone Company, Celulares Telefonica, and any other Person
pursuant to which the Borrower is granted the right to resell cellular or paging
air time on behalf of such Person.
"Retiree Health Plan" means an "employee welfare benefit plan" within
the meaning of Section 3(1) of ERISA that provides benefits to individuals after
termination of their employment, other than as required by Section 601 of ERISA.
"Solvent" means, with respect to any Person on a particular date, that
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be
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computed at the amount that, in light of all the facts and circumstances
existing at such time, represents the amount that reasonably can be expected to
become an actual or matured liability.
"Subsidiary" of a Person means a corporation, partnership, limited
liability company, or other entity in which that Person directly or indirectly
owns or controls the shares of stock or other ownership interests having
ordinary voting power to elect a majority of the board of directors (or appoint
other comparable managers) of such corporation, partnership, limited liability
company, or other entity.
"Taxes" has the meaning set forth in Section 2.10.
"Voidable Transfer" has the meaning set forth in Section 15.8.
1.2 Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP. When used herein, the term
"financial statements" shall include the notes and schedules thereto. Whenever
the term "Borrower" is used in respect of a financial covenant or a related
definition, it shall be understood to mean Borrower on a consolidated basis
unless the context clearly requires otherwise.
1.3 Construction. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the term "including" is not limiting, and the term
"or" has, except where otherwise indicated, the inclusive meaning represented by
the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. An Event of Default shall "exist",
"continue" or be "continuing" until such Event of Default has been waived in
writing by Foothill. Section, subsection, clause, schedule, and exhibit
references are to this Agreement unless otherwise specified. Any reference in
this Agreement or in the Loan Documents to this Agreement or any of the Loan
Documents shall include all alterations, amendments, changes, extensions,
modifications, renewals, replacements, substitutions, and supplements, thereto
and thereof, as applicable.
1.4 Schedules and Exhibits. All of the schedules and exhibits attached to
this Agreement shall be deemed incorporated herein by reference.
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2. LOAN AND TERMS OF PAYMENT.
2.1 Revolving Advances.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to make advances ("Advances") to Borrower in an amount
outstanding not to exceed at any one time the lesser of (i) the Maximum Amount,
or (ii) the Borrowing Base less the aggregate amount of the Inventory Reserves.
----
For purposes of this Agreement, "Borrowing Base", as of any date of
determination, shall mean the result of:
(x) the lesser of (i) (a) eighty percent (80%) of Eligible
Interconnect Accounts plus seventy percent (70%) of Eligible Cellular
----
Accounts, less (b) the amount, if any, of the Dilution Reserve, and
----
(ii) an amount equal to Borrower's Collections with respect to
Accounts for the immediately preceding sixty (60) day period, plus
(y) the lowest of (i) $1,000,000, (ii) twenty percent (20%)
of the value of Eligible Inventory, and (iii) one hundred percent
(100%) of the amount of credit availability created by clause (x)
----------
above, minus
(z) the aggregate amount of reserves, if any, established by
Foothill under Section 2.1(b).
--------------
(b) Anything to the contrary in Section 2.1(a) above notwithstanding,
--------------
Foothill may create reserves against the Borrowing Base or reduce its advance
rates based upon Eligible Accounts or Eligible Inventory without declaring an
Event of Default if it determines, in its reasonable discretion, that any of the
circumstances described in clauses (b), (c) or (d) of the definition of
"Material Adverse Change" have occurred. Additionally, Borrower acknowledges
that the advance rate against Eligible Inventory set forth in clause (y)(ii)
--------------
above is based on the appraisal of Eligible Inventory performed by Koll-DoveTech
Global Valuation prior to the Closing Date and agrees that Foothill may adjust
the advance rate against Eligible Inventory set forth in clause (y)(ii) above
--------------
based on the results of subsequent quarterly appraisals of the Eligible
Inventory.
(c) Foothill shall have no obligation to make Advances hereunder to
the extent they would cause the outstanding Obligations to exceed the Maximum
Amount.
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<PAGE>
(d) Amounts borrowed pursuant to this Section 2.1 may be repaid and,
-----------
subject to the terms and conditions of this Agreement, reborrowed at any time
during the term of this Agreement.
2.2 Letters of Credit. Intentionally Omitted.
2.3 Overadvances. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Foothill pursuant to Section 2.1 is greater than
-----------
either the Dollar or percentage limitations set forth in Section 2.1 (an
-----------
"Overadvance"), Borrower immediately shall pay to Foothill, in cash, the amount
of such excess to be used by Foothill to repay Advances outstanding under
Section 2.1.
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2.4 Interest: Rates, Payments, and Calculations; Promise to Pay.
(a) Interest Rate. Except as provided in clause (c) below, all
Obligations shall bear interest at a per annum rate equal to the Reference Rate
plus one and one-quarter percentage points (1.25%).
- ----
(b) Intentionally Omitted.
(c) Default Rate. Upon the occurrence and during the continuation of
an Event of Default, all Obligations shall bear interest at a per annum rate
equal to the Reference Rate plus three and one-quarter percentage points
----
(3.25%).
(d) Minimum Interest. Notwithstanding anything to the contrary set
forth in clauses (a) or (c) above, in no event shall the rate of interest
chargeable hereunder for any day be less than eight percent (8.00%) per annum,
and in no event shall the aggregate interest chargeable pursuant to this Section
-------
2.4 for any month be less than $4,000. To the extent that interest accrued
- ---
hereunder at the rate set forth herein would be less than eight percent (8.00%)
per annum, the interest rate chargeable hereunder for such day automatically
shall be deemed increased to such minimum rate. To the extent that interest
accrued hereunder at the rates set forth herein (including the minimum interest
rate) would yield less than $4,000 per month, the rates chargeable hereunder for
the period in question automatically shall be deemed increased to such rates
that would result in the minimum amount of interest being accrued and payable
hereunder. Foothill shall be entitled to such minimum interest even if there
are no Advances outstanding hereunder and, in such event, the amount of such
minimum interest shall be deemed to be an additional fee payable by Borrower
hereunder.
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(e) Payments. Interest payable hereunder shall be due and payable, in
arrears, on the first day of each month during the term hereof. Borrower hereby
authorizes Foothill, at its option, without prior notice to Borrower, to charge
such interest, all Foothill Expenses (as and when incurred), the fees and
charges provided for in Section 2.9 (as and when accrued or incurred), and all
-----------
installments or other payments due under any Loan Document to Borrower's Loan
Account, which amounts thereafter shall accrue interest at the rate then
applicable to Advances hereunder. Any interest not paid when due shall be
compounded and shall thereafter accrue interest at the rate then applicable to
Advances hereunder.
(f) Computation. The Reference Rate as of the date of this Agreement
is 8.50% per annum. In the event the Reference Rate is changed from time to time
hereafter, the applicable rate of interest hereunder automatically and
immediately shall be increased or decreased by an amount equal to such change in
the Reference Rate. All interest and fees chargeable under the Loan Documents
shall be computed on the basis of a 360 day year for the actual number of days
elapsed.
(g) Intent to Limit Charges to Maximum Lawful Rate. In no event
shall the interest rate or rates payable under this Agreement, plus any other
amounts paid in connection herewith, exceed the highest rate permissible under
any law that a court of competent jurisdiction shall, in a final determination,
deem applicable. Borrower and Foothill, in executing and delivering this
Agreement, intend legally to agree upon the rate or rates of interest and manner
of payment stated within it; provided, however, that, anything contained herein
-------- -------
to the contrary notwithstanding, if said rate or rates of interest or manner of
payment exceeds the maximum allowable under Applicable Law, then, ipso facto as
---- -----
of the date of this Agreement, Borrower is and shall be liable only for the
payment of such maximum as allowed by law, and payment received from Borrower in
excess of such legal maximum, whenever received, shall be applied to reduce the
principal balance of the Obligations to the extent of such excess.
(h) Promise to Pay. Borrower hereby promises to pay to Foothill the
principal amount of all Advances, together with accrued interest, fees and other
amounts due thereon, all in accordance with the terms of this Agreement.
2.5 Collection of Accounts. Borrower shall at all times maintain
lockboxes (the "Lockboxes") and, immediately after the Closing Date, shall
instruct all Account Debtors with respect to the Accounts, General Intangibles,
and Negotiable Collateral of Borrower to remit all Collections (other than the
---
payment of rents subject to a prior lien of First Bank as set forth in clause
(k) of the definition of "Permitted Liens" set forth herein) in respect thereof
to such Lockboxes. Borrower, Foothill, and the
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Lockbox Banks shall enter into the Lockbox Agreements, which among other things
shall provide for the opening of a Lockbox Account for the deposit of
Collections at a Lockbox Bank. Borrower agrees that all Collections and other
amounts received by Borrower from any Account Debtor or any other source
immediately upon receipt shall be deposited into a Lockbox Account. No Lockbox
Agreement or arrangement contemplated thereby shall be modified by Borrower
without the prior written consent of Foothill. Upon the terms and subject to the
conditions set forth in the Lockbox Agreements, all amounts received in each
Lockbox Account shall be wired each Business Day into an account (the "Foothill
Account") maintained by Foothill at a depositary selected by Foothill.
2.6 Crediting Payments; Application of Collections. The receipt of
any Collections by Foothill (whether from transfers to Foothill by the Lockbox
Banks pursuant to the Lockbox Agreements or otherwise) immediately shall be
applied provisionally to reduce the Obligations outstanding under Section 2.1,
-----------
but shall not be considered a payment on account unless such Collection item is
a wire transfer of immediately available federal funds and is made to the
Foothill Account or unless and until such Collection item is honored when
presented for payment. From and after the Closing Date, Foothill shall be
entitled to charge Borrower for one (1) Business Day of `clearance' or `float'
at the rate set forth in Section 2.4(a) or Section 2.4(c)(i), as applicable, on
-------------- -----------------
all Collections that are received by Foothill (regardless of whether forwarded
by the Lockbox Banks to Foothill, whether provisionally applied to reduce the
Obligations under Section 2.1, or otherwise). This across-the-board one (1)
-----------
Business Day clearance or float charge on all Collections is acknowledged by the
parties to constitute an integral aspect of the pricing of Foothill's financing
of Borrower, and shall apply irrespective of the characterization of whether
receipts are owned by Borrower or Foothill, and whether or not there are any
outstanding Advances, the effect of such clearance or float charge being the
equivalent of charging one (1) Business Day of interest on such Collections.
Should any Collection item not be honored when presented for payment, then
Borrower shall be deemed not to have made such payment, and interest shall be
recalculated accordingly. Anything to the contrary contained herein
notwithstanding, any Collection item shall be deemed received by Foothill only
if it is received into the Foothill Account on a Business Day on or before 2:00
p.m. Eastern time. If any Collection item is received into the Foothill Account
on a non-Business Day or after 2:00 p.m. Eastern time on a Business Day, it
shall be deemed to have been received by Foothill as of the opening of business
on the immediately following Business Day.
2.7 Designated Account. Foothill is authorized to make the Advances
in immediately available funds under this Agreement based upon telephonic or
other instructions received from anyone purporting to be an Authorized Person,
or without instructions if pursuant to Section 2.4(e). Borrower agrees to
--------------
establish and maintain the
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Designated Account with the Designated Account Bank for the purpose of receiving
the proceeds of the Advances requested by Borrower and made by Foothill
hereunder. Unless otherwise agreed by Foothill and Borrower, any Advance
requested by Borrower and made by Foothill hereunder shall be made to the
Designated Account.
2.8 Maintenance of Loan Account; Statements of Obligations. Foothill
shall maintain an account on its books in the name of Borrower (the "Loan
Account") on which Borrower will be charged with all Advances made by Foothill
to Borrower or for Borrower's account, including, accrued interest, Foothill
Expenses, and any other payment Obligations of Borrower. In accordance with
Section 2.6, the Loan Account will be credited with all payments received by
- -----------
Foothill from Borrower or for Borrower's account, including all amounts received
in the Foothill Account from any Lockbox Bank. Foothill shall render statements
regarding the Loan Account to Borrower, including principal, interest, fees, and
including an itemization of all charges and expenses constituting Foothill
Expenses owing, and such statements shall be conclusively presumed to be correct
and accurate and constitute an account stated between Borrower and Foothill
unless, within thirty (30) days after receipt thereof by Borrower, Borrower
shall deliver to Foothill written objection thereto describing the error or
errors contained in any such statements.
2.9 Fees. Borrower shall pay to Foothill the following fees:
(a) Closing Fee. On the Closing Date, a closing fee of $7,500;
(b) Unused Line Fee. On the first day of each month during the
term of this Agreement, an unused line fee in an amount equal to three-eighths
of one percent (0.375%) per annum times the Average Unused Portion of the
Maximum Amount;
(c) Annual Facility Fee. On each anniversary of the Closing Date,
an annual facility fee in an amount equal to one-eighth of one percent (0.125%)
of the Maximum Amount;
(d) Financial Examination, Documentation, and Appraisal Fees.
Foothill's customary fee of $650 per day per examiner, plus out-of-pocket
expenses for each financial analysis and examination (i.e., audits) of Borrower
performed by personnel employed by Foothill (provided, so long as no Event of
Default has occurred, Borrower shall not be required to pay examiner fees
(specifically excluding out-of-pocket expenses) during any calendar year in an
aggregate amount in excess of $13,000); Foothill's customary appraisal fee of
$1,500 per day per appraiser, plus out-of-pocket expenses for each appraisal of
the Collateral performed by personnel employed by Foothill; and, the actual
charges paid or incurred by Foothill if it elects to employ the services of one
or
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more third Persons to perform such financial analyses and examinations (i.e.,
audits) of Borrower or to appraise the Collateral; and, on each anniversary of
the Closing Date, Foothill's customary fee of $1,000 per year for its loan
documentation review; and Borrower acknowledges that Foothill, Koll-DoveTech
Global Valuation, Daley-Hodkin Corporation or any other Person selected by
Foothill and reasonably acceptable to Borrower, shall conduct appraisals,
reviews and/or audits of the Collateral not less than once every ninety (90)
days (commencing ninety (90) days from the date of the appraisal obtained by
Foothill prior to the Closing Date); provided, so long as no Event of Default
has occurred, Borrower shall not be required to pay fees for any such quarterly
appraisal in an aggregate amount, together with all such appraisal fees paid by
Cortelco International, Inc. under the CII Loan Agreement during such quarter,
in excess of $4,000, and such appraisals shall not occur more than once each
ninety day period; and
(e) Servicing Fee. On the first day of each month during the
term of this Agreement, and thereafter so long as any Obligations are
outstanding, a servicing fee in an amount equal to $1,500.
(f) Miscellaneous. The fees set forth above shall be fully earned
when due, non-refundable when paid and, if applicable, computed on the basis of
a 360 day year for the actual number of days elapsed.
Section 2.10 Tax Indemnity. (a) All payments by Borrower under this
Agreement or under any other Loan Document shall be made free and clear of and
without deduction or withholding for any and all taxes, levies, imposts,
deductions, charges or withholdings and all liabilities with respect thereto,
excluding taxes paid or payable by Foothill or required to be withheld from a
payment to Foothill as a result of Foothill having a present or former
connection to the jurisdiction imposing such tax (other than such connection
arising solely from Foothill having executed and delivered or performed its
obligations or received a payment under, this Agreement or any other Loan
Document) (all such non-excluded taxes, levies, imposts, deductions, charges,
withholdings and other liabilities being referred to herein as "Taxes"), unless
such Taxes are required by law or the administration thereof to be withheld or
deducted. If Borrower shall be required by law or the administration thereof to
deduct or withhold any Taxes from or in respect of any sum payable under this
Agreement or any other Loan Document: (i) the sum payable shall be increased
(and, for greater certainty, in the case of interest, the amount of interest
shall be increased) as may be necessary so that after making all required
deductions or withholdings (including deductions or withholdings applicable to
additional amounts paid under this Section 2.10) Foothill receives an amount
equal to the sum it would have received if no deduction or withholding had been
made; (ii) Borrower shall make such deductions or withholdings; and (iii)
Borrower shall pay the full amount
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deducted or withheld to the relevant taxation or other authority in accordance
with Applicable Law.
(b) Borrower shall pay any present or future stamp or documentary
taxes or any other foreign exchange, foreign investment, property or any other
type of taxes, charges, fees or costs or similar levies or any financial
institutions duty and debits tax which arise from any payment made under this
Agreement or any other Loan Document or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement or any other Loan
Document (all such taxes, fees or charges, costs, and levies being herein
referred to as "Other Taxes").
(c) Borrower shall indemnify Foothill for the full amount of Taxes and
Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by
any jurisdiction on amounts payable under this Section 2.10) paid by Foothill
and any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes are correctly
or legally asserted so that, after the receipt of any indemnity payment under
this Section 2.10, Foothill shall be in the same position as it would have been
had it not been required to pay any Taxes or Other Taxes. Borrower shall also
indemnify Foothill on a after-tax basis for any additional taxes on net income
that Foothill may be obliged to pay as the result of the receipt of additional
amounts under this Section 2.10 (computed on the basis that the only receipts
and deductions of Foothill are in respect of the Obligations). Payment under
this indemnification shall be made within thirty (30) days from the date
Foothill makes written demand therefor. A certificate as to the amounts owing by
Borrower under this Section 2.10 submitted to Borrower by Foothill shall be
conclusive evidence, absent manifest error, of the amount due from Borrower to
Foothill. For greater certainty, the parties acknowledge that nothing contained
in this Section 2.10 shall be interpreted as requiring Borrower to pay to any
taxation authority any Taxes or Other Taxes owed by it to such taxation
authority and which are contested in good faith and by proper proceedings and
against which adequate reserves are maintained, provided that any such contest
of Taxes or Other Taxes shall have no effect on any rights of Foothill under
this Section 2.10, including without limitation, the right to receive
indemnification payments within thirty (30) days of written demand therefor.
(d) Borrower shall furnish to Foothill the original or a certified
copy of a receipt evidencing payment of Taxes or Other Taxes, promptly after
receipt by Borrower of any such receipt.
(e) If Foothill is, in its sole opinion, entitled to claim a refund or
able to apply for or otherwise take advantage of any tax credit, tax deduction
or similar benefit by
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reason of any withholding or deduction made by Borrower in respect of a payment
made by it hereunder which payment shall have been increased pursuant to Section
2.10(a), then Foothill will use reasonable efforts to obtain such refund,
credit, deduction or benefit and upon receipt thereof will pay to Borrower such
amount (if any) not exceeding the increased amount paid by Borrower as equals
the net after-tax value to Foothill of such part of such refund, credit,
deduction or benefit as it considers is allocable to such withholding or
deduction having regard to all its dealings giving rise to similar credits,
deductions or benefits in relation to the same tax period and to the cost of
obtaining the same. There is no obligation for Foothill to claim any refund or
to apply for or take advantage of any tax credit, tax deduction or similar
benefit as contemplated by this paragraph. Nothing herein shall (i) interfere
with the right of Foothill to arrange its tax affairs in whatever manner it
deems appropriate; and (ii) Foothill shall not be obligated to disclose to
Borrower any information regarding its tax affairs or tax computations, except
to the extent that such information is necessary to determine Borrower's
liability hereunder. Further, Foothill shall not be under any obligation to
claim relief from its corporate profits or similar tax liability in respect of
any such deduction or withholding in priority to any other relief, claims,
credits or deductions available to it.
(f) Notwithstanding anything in this Section 2.10 to the contrary, at
no time shall Borrower be obligated to pay any corporate level excise tax,
franchise tax, income tax or any privilege tax measured based on income of
Foothill.
(g) Without prejudice to the survival of any other agreement or
obligation of the Borrower hereunder, the obligations of Borrower under this
Section 2.10 shall survive the payment in full of the Obligations.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 Conditions Precedent to the Initial Advance. The obligation
of Foothill to make the initial Advance is subject to the fulfillment, to the
satisfaction of Foothill and its counsel, of each of the following conditions on
or before the Closing Date:
(a) the Closing Date shall occur on or before August 29,
1997;
(b) Intentionally Omitted.
(c) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
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(i) the Lockbox Agreements;
(ii) the Disbursement Letter;
(iii) the Pay-Off Letter, lien termination statements
and other documentation evidencing the termination by
Existing Lender of its Liens in and to the properties
and assets of Borrower, and lien termination statements
for all other Liens in and to the properties and assets
of Borrower that are not Permitted Liens; and
(iv) the Chattel Mortgage, the Factor's Lien
Agreement, the Assignment of Accounts Receivable, and
the other Loan Documents;
(d) Foothill shall have received a certificate from the
Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution, delivery, and performance of this Agreement
and the other Loan Documents to which Borrower is a party and authorizing
specific officers of Borrower to execute the same;
(e) Foothill shall have received copies of Borrower's
Governing Documents, as amended, modified, or supplemented to the Closing Date,
certified by the Secretary of Borrower;
(f) Foothill shall have received a certificate of status
with respect to Borrower, dated within ten (10) days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate that Borrower is in
good standing in such jurisdiction;
(g) Intentionally Omitted.
(h) Foothill shall have received a certificate of
insurance, together with the endorsements thereto, as are required by Section
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6.10, the form and substance of which shall be satisfactory to Foothill and its
- ----
counsel;
(i) Foothill shall have received such Collateral Access
Agreements from such lessors, warehousemen, bailees, and other third persons as
Foothill may require;
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(j) Foothill shall have received an opinion of Borrower's
counsel in form and substance satisfactory to Foothill and its counsel in their
sole discretion;
(k) After giving effect to the making of the requested
initial Advance hereunder, Borrower shall have demonstrated that it has, on the
Closing Date, funds available to be borrowed hereunder in an aggregate amount
equal to or greater than $200,000;
(l) Foothill shall have received satisfactory evidence that
all tax returns required to be filed by Borrower have been timely filed and all
taxes upon Borrower or its properties, assets, income, and franchises (including
real property taxes and payroll taxes) have been paid prior to delinquency,
except such taxes that are the subject of a Permitted Protest; and
(m) all other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered,
executed, or recorded and shall be in form and substance satisfactory to
Foothill and its counsel.
3.2 Conditions Precedent to all Advances. The following shall be
conditions precedent to all Advances hereunder:
(a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all respects
on and as of the date of such extension of credit, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
(b) no Default or Event of Default shall have occurred and
be continuing on the date of such extension of credit, nor shall either result
from the making thereof; and
(c) no injunction, writ, restraining order, or other order
of any nature prohibiting, directly or indirectly, the extending of such credit
shall have been issued and remain in force by any governmental authority against
Borrower, Foothill, or any of their Affiliates.
3.3 Condition Subsequent. As a condition subsequent to initial
closing hereunder, Borrower shall perform or cause to be performed the following
(the failure by Borrower to so perform or cause to be performed constituting an
Event of Default):
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(a) within thirty (30) days of the Closing Date, deliver to
Foothill the certified copies of the policies of insurance, together with the
endorsements thereto, as are required by Section 6.10, the form and substance of
------------
which shall be satisfactory to Foothill and its counsel.
3.4 Term. This Agreement shall become effective upon the
execution and delivery hereof by Borrower and Foothill and shall continue in
full force and effect for a term ending on the date (the "Maturity Date") that
is four (4) years from the Closing Date, unless sooner terminated pursuant to
the terms hereof. The foregoing notwithstanding, Foothill shall have the right
to terminate its obligations under this Agreement immediately and without notice
upon the occurrence and during the continuation of an Event of Default.
3.5 Effect of Termination. On the date of termination of this
Agreement, all Obligations immediately shall become due and payable without
notice or demand. No termination of this Agreement, however, shall relieve or
discharge Borrower of Borrower's duties, Obligations, or covenants hereunder,
and Foothill's continuing security interests in the Collateral shall remain in
effect until all Obligations have been fully and finally discharged and
Foothill's obligation to provide additional credit hereunder is terminated.
3.6 Early Termination by Borrower. Borrower has the option, at
any time upon ninety (90) days prior written notice to Foothill, to terminate
this Agreement, without penalty, by paying to Foothill, in cash, the Obligations
in full.
3.7 Termination Upon Event of Default. [Intentionally Omitted.]
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower hereby grants to
Foothill a continuing security interest in all currently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Foothill's security interests
in the Collateral shall attach to all Collateral without further act on the part
of Foothill or Borrower. Anything contained in this Agreement or any other Loan
Document to the contrary notwithstanding, except as permitted by Section 7.4,
-----------
Borrower has no authority, express or implied, to sell or dispose of any item or
portion of the Collateral.
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4.2 Negotiable Collateral. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower, immediately upon the request of Foothill, shall endorse and deliver
physical possession of such Negotiable Collateral to Foothill.
4.3 Collection of Accounts, General Intangibles, and Negotiable
Collateral. Upon the occurrence and during the continuation of an Event of
Default or if Foothill deems itself insecure, Foothill or Foothill's designee
may (a) notify customers or Account Debtors of Borrower that the Accounts,
General Intangibles, or Negotiable Collateral have been assigned to Foothill or
that Foothill has a security interest therein, and (b) collect the Accounts,
General Intangibles, and Negotiable Collateral directly and charge the
collection costs and expenses to the Loan Account. Borrower agrees that it will
hold in trust for Foothill, as Foothill's trustee, any Collections that it
receives and immediately will deliver said Collections to Foothill in their
original form as received by Borrower.
4.4 Delivery of Additional Documentation Required. At any time
upon the request of Foothill, Borrower shall execute and deliver to Foothill all
notice of lien filings, financing statements, continuation financing statements,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
accounts, letters of authority, and all other documents that Foothill reasonably
may request, in form reasonably satisfactory to Foothill, to perfect and
continue perfected Foothill's security interests in the Collateral, and in order
to fully consummate all of the transactions contemplated hereby and under the
other the Loan Documents.
4.5 Rights of Foothill. Borrower hereby irrevocably agrees that
Foothill shall have the right to (a) if Borrower refuses to, or fails timely to
execute and deliver any of the documents described in Section 4.4, sign the name
-----------
of Borrower on any of the documents described in Section 4.4, (b) at any time
-----------
that an Event of Default has occurred and is continuing or Foothill deems itself
insecure, sign Borrower's name on any invoice or bill of lading relating to any
Account, drafts against Account Debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to Account Debtors, (c) send requests for
verification of Accounts, (d) endorse Borrower's name on any Collection item
that may come into Foothill's possession, (e) at any time that an Event of
Default has occurred and is continuing or Foothill deems itself insecure, notify
the post office authorities to change the address for delivery of Borrower's
mail to an address designated by Foothill, to receive and open all mail
addressed to Borrower, and to retain all mail relating to the Collateral and
forward all other mail to Borrower, (f) at any time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure, make, settle, and
adjust all claims under Borrower's policies of insurance and make all
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determinations and decisions with respect to such policies of insurance, and (g)
at any time that an Event of Default has occurred and is continuing or Foothill
deems itself insecure, settle and adjust disputes and claims respecting the
Accounts directly with Account Debtors, for amounts and upon terms that Foothill
determines to be reasonable, and Foothill may cause to be executed and delivered
any documents and releases that Foothill determines to be necessary. Each and
every one of Foothill's rights and powers set forth herein, being coupled with
an interest, is irrevocable until all of the Obligations have been fully and
finally repaid and performed and Foothill's obligation to extend credit
hereunder is terminated.
4.6 Right to Inspect. Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter (during
normal business hours if no Event of Default then exists or at any time if an
Event of Default then exists) to inspect Borrower's Books and to check, test,
and appraise the Collateral in order to verify Borrower's financial condition or
the amount, quality, value, condition of, or any other matter relating to, the
Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement, Borrower
makes the following representations and warranties which shall be true, correct,
and complete in all respects as of the date hereof, and shall be true, correct,
and complete in all respects as of the Closing Date, and at and as of the date
of the making of each Advance thereafter, as though made on and as of the date
of such Advance (except to the extent that such representations and warranties
relate solely to an earlier date) and such representations and warranties shall
survive the execution and delivery of this Agreement:
5.1 No Encumbrances. Borrower has good and indefeasible title to
the Collateral, free and clear of Liens except for Permitted Liens.
5.2 Eligible Accounts. The Eligible Accounts are bona fide
existing obligations created by the sale and delivery of Inventory or the
rendition of services to Account Debtors in the ordinary course of Borrower's
business, unconditionally owed to Borrower without defenses, disputes, offsets,
counterclaims, or rights of return or cancellation. The property giving rise to
such Eligible Accounts has been delivered to the Account Debtor, or to the
Account Debtor's agent for immediate shipment to and unconditional acceptance by
the Account Debtor. Borrower has not received notice of actual or imminent
bankruptcy, insolvency, or material impairment of the financial condition of any
Account Debtor regarding any Eligible Account.
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5.3 Eligible Inventory. All Eligible Inventory is of good and
merchantable quality, free from known defects.
5.4 Equipment. All of the Equipment is used or held for use in
Borrower's business and is fit for such purposes.
5.5 Location of Inventory and Equipment. The Inventory and Equipment
are not stored with a bailee, consignee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on Schedule 6.12 or otherwise permitted by Section 6.12.
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5.6 Inventory Records. Borrower keeps correct and accurate records
itemizing and describing the kind, type, quality, and quantity of the Inventory,
and Borrower's cost therefor.
5.7 Location of Chief Executive Office; FEIN. The chief executive
office of Borrower is located at the address indicated in the preamble to this
Agreement and Borrower's FEIN is 66-023-7596. Borrower does not have or
maintain any other office or place of business.
5.8 Due Organization and Qualification; Subsidiaries.
(a) Borrower is duly organized and existing and in good standing
under the laws of the jurisdiction of its incorporation and qualified and
licensed to do business in, and in good standing in, any state where the failure
to be so licensed or qualified reasonably could be expected to have a Material
Adverse Change.
(b) Set forth on Schedule 5.8, is a complete and accurate list of
------------
all shareholders of Borrower owning five (5) percent or more of Borrower's
capital stock as of the Closing Date, showing: (i) the number of shares of each
class of common and preferred stock authorized for Borrower; and (ii) the number
and the percentage of the outstanding shares of each such class owned by such
shareholders.
(c) Set forth on Schedule 5.8, is a complete and accurate list of
------------
Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of
their incorporation; (ii) the number of shares of each class of common and
preferred stock authorized for each of such Subsidiaries; and (iii) the number
and the percentage of the outstanding shares of each such class owned directly
or indirectly by Borrower. All of the outstanding capital stock of each such
Subsidiary has been validly issued and is fully paid and non-assessable.
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(d) Except as set forth on Schedule 5.8, no capital stock (or any
------------
securities, instruments, warrants, options, purchase rights, conversion or
exchange rights, calls, commitments or claims of any character convertible into
or exercisable for capital stock) of Borrower or any direct or indirect
Subsidiary of Borrower is subject to the issuance of any security, instrument,
warrant, option, purchase right, conversion or exchange right, call, commitment
or claim of any right, title, or interest therein or thereto.
5.9 Due Authorization; No Conflict.
(a) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(b) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party do not and will not (i)
violate any provision of federal, state, or local law or regulation (including
Regulations G, T, U, and X of the Federal Reserve Board) applicable to Borrower,
the Governing Documents of Borrower, or any order, judgment, or decree of any
court or other Governmental Authority binding on Borrower, (ii) conflict with,
result in a breach of, or constitute (with due notice or lapse of time or both)
a default under any material contractual obligation or material lease of
Borrower (including the First Bank Mortgage), (iii) result in or require the
creation or imposition of any Lien of any nature whatsoever upon any properties
or assets of Borrower, other than Permitted Liens, or (iv) require any approval
of stockholders or any approval or consent of any Person under any material
contractual obligation of Borrower, except for Alcatel (which consent has been
obtained).
(c) Other than the filing of appropriate notice of lien
statements, the Factor's Lien Agreement and the Chattel Mortgage, the execution,
delivery, and performance by Borrower of this Agreement and the Loan Documents
to which Borrower is a party do not and will not require any registration with,
consent, or approval of, or notice to, or other action with or by, any federal,
state, foreign, or other Governmental Authority or other Person, except for
Alcatel (which consent has been obtained).
(d) This Agreement and the Loan Documents to which Borrower is a
party, and all other documents contemplated hereby and thereby, when executed
and delivered by Borrower will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency,
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reorganization, moratorium, or similar laws relating to or limiting creditors'
rights generally.
(e) The Liens granted by Borrower to Foothill in and to its
properties and assets pursuant to this Agreement and the other Loan Documents
are validly created, perfected, and first priority Liens, subject only to
Permitted Liens.
5.10 Litigation. There are no actions or proceedings pending by or
against Borrower or any of its assets before any court or governmental agency
and Borrower does not have knowledge or belief of any pending, threatened, or
imminent litigation, governmental investigations, or claims, complaints,
actions, or prosecutions involving Borrower, its assets or any guarantor of the
Obligations, except for: (a) ongoing collection matters in which Borrower is
the plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters arising
-------------
after the date hereof that, if decided adversely to Borrower, would not have a
Material Adverse Change.
5.11 No Material Adverse Change. All financial statements relating to
Borrower or any guarantor of the Obligations that have been delivered by
Borrower to Foothill have been prepared in accordance with GAAP (except, in the
case of unaudited financial statements, for the lack of footnotes and being
subject to year-end audit adjustments) and fairly present Borrower's (or such
guarantor's, as applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been
a Material Adverse Change with respect to Borrower (or such guarantor, as
applicable) since the date of the latest financial statements submitted to
Foothill on or before the Closing Date.
5.12 Solvency. Borrower is Solvent. No transfer of property is being
made by Borrower and no obligation is being incurred by Borrower in connection
with the transactions contemplated by this Agreement or the other Loan Documents
with the intent to hinder, delay, or defraud either present or future creditors
of Borrower.
5.13 Employee Benefits. None of Borrower, any of its Subsidiaries, or
any of their ERISA Affiliates maintains or contributes to any Benefit Plan,
other than those listed on Schedule 5.13. Borrower, each of its Subsidiaries
-------------
and each ERISA Affiliate have satisfied the minimum funding standards of ERISA
and the IRC with respect to each Benefit Plan to which it is obligated to
contribute. No ERISA Event has occurred nor has any other event occurred that
may result in an ERISA Event that reasonably could be expected to result in a
Material Adverse Change. None of Borrower or its Subsidiaries, any ERISA
Affiliate, or any fiduciary of any Plan is subject to any direct or indirect
liability with respect to any Plan under any Applicable Law or agreement. None
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of Borrower or its Subsidiaries or any ERISA Affiliate is required to provide
security to any Plan under Section 401(a)(29) of the IRC.
5.14 Environmental Condition. None of Borrower's properties or assets
has ever been used by Borrower or, to the best of Borrower's knowledge, by
previous owners or operators in the disposal of, or to produce, store, handle,
treat, release, or transport, any Hazardous Materials. To the best of
Borrower's knowledge, none of Borrower's properties or assets has ever been
designated or identified in any manner pursuant to any environmental protection
statute as a Hazardous Materials disposal site, or a candidate for closure
pursuant to any environmental protection statute. To the best of Borrower's
knowledge, no Lien arising under any environmental protection statute has
attached to any revenues or to any real or personal property owned or operated
by Borrower. Borrower has not received a summons, citation, notice, or
directive from the Environmental Protection Agency or any other federal or state
governmental agency concerning any action or omission by Borrower resulting in
the releasing or disposing of Hazardous Materials into the environment.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, and
unless Foothill shall otherwise consent in writing, Borrower shall do all of the
following:
6.1 Accounting System. Maintain a standard and modern system of
accounting that enables Borrower to produce financial statements in accordance
with GAAP, and maintain records pertaining to the Collateral that contain
information as from time to time may reasonably be requested by Foothill.
Borrower also shall keep a modern inventory reporting system that shows all
additions, sales, claims, returns, and allowances with respect to the Inventory.
6.2 Collateral Reporting. Provide Foothill with the following
documents at the following times in form satisfactory to Foothill: (a) on each
Business Day, a sales journal, collection journal, and credit register since the
last such schedule and a calculation of the Borrowing Base as of such date, (b)
on a monthly basis and, in any event, by no later than the tenth (10th) day of
each month during the term of this Agreement, (i) a detailed calculation of the
Borrowing Base, and (ii) a detailed aging, by total, of the Accounts, together
with a reconciliation to the detailed calculation of the Borrowing Base
previously provided to Foothill, (c) on a monthly basis and, in any event, by no
later than the tenth (10th) day of each month during the term of this Agreement,
a summary aging, by vendor, of Borrower's accounts payable and any book
overdraft, (d)
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on a weekly basis, Inventory reports specifying Borrower's cost and the
wholesale market value of its Inventory by category, with additional detail
showing additions to and deletions from the Inventory, (e) on each Business Day,
notice of all returns, disputes, or claims, (f) upon request, copies of invoices
in connection with the Accounts, customer statements, credit memos, remittance
advices and reports, deposit slips, shipping and delivery documents in
connection with the Accounts and for Inventory and Equipment acquired by
Borrower, purchase orders and invoices, (g) on a quarterly basis, a detailed
list of Borrower's customers, (h) on a monthly basis, a calculation of the
Dilution for the prior month; and (i) such other reports as to the Collateral or
the financial condition of Borrower as Foothill may request from time to time.
Original sales invoices evidencing daily sales shall be mailed by Borrower to
each Account Debtor and, upon the occurrence of an Event of Default or at
Foothill's request if Foothill deems itself insecure, the invoices shall
indicate on their face that the Account has been assigned to Foothill and that
all payments are to be made directly to Foothill.
6.3 Financial Statements, Reports, Certificates. (a) Deliver to
Foothill: (i) as soon as available, but in any event within forty-five (45)
days after the end of each month during each of Borrower's fiscal years, a
company prepared balance sheet, income statement, and statement of cash flow
covering Borrower's operations during such period; (ii) as soon as available,
but in any event within forty-five (45) days after the end of each fiscal year
of Borrower, a company prepared balance sheet, income statement, and statement
of cash flow covering Borrower's operations during such period; and (iii) as
soon as available, but in any event within ninety (90) days after the end of
each of Borrower's fiscal years, financial statements of Borrower for each such
fiscal year, audited by independent certified public accountants reasonably
acceptable to Foothill and certified, without any qualifications, by such
accountants to have been prepared in accordance with GAAP, together with a
certificate of such accountants addressed to Foothill stating that such
accountants do not have knowledge of the existence of any Default or Event of
Default. Such audited financial statements shall include a balance sheet,
profit and loss statement, and statement of cash flow and, if prepared, such
accountants' letter to management. If Borrower is a parent company of one or
more Subsidiaries, or Affiliates, or is a Subsidiary or Affiliate of another
company, then, in addition to the financial statements referred to above,
Borrower agrees to deliver financial statements prepared on a consolidating
basis so as to present Borrower and each such related entity separately, and on
a consolidated basis.
(b) Together with the above, if Borrower becomes a public
corporation, Borrower also shall deliver to Foothill Borrower's Form 10-Q
Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and
any other filings made by Borrower with the Securities and Exchange Commission,
if any, as soon
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as the same are filed, or any other information that is provided by Borrower to
its shareholders, and any other report reasonably requested by Foothill relating
to the financial condition of Borrower, and if Parent becomes a public
corporation, Borrower shall also deliver to Foothill each of the above-
referenced reports of, and filings made by, Parent.
(c) Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrower shall deliver to Foothill a certificate
--------------
signed by its chief financial officer stating that: (i) all financial statements
delivered or caused to be delivered to Foothill hereunder have been prepared in
accordance with GAAP (except, in the case of unaudited financial statements, for
the lack of footnotes and being subject to year-end audit adjustments) and
fairly present the financial condition of Borrower, (ii) the representations and
warranties of Borrower contained in this Agreement and the other Loan Documents
are true and correct in all material respects on and as of the date of such
certificate, as though made on and as of such date (except to the extent that
such representations and warranties relate solely to an earlier date), and (iii)
on the date of delivery of such certificate to Foothill there does not exist any
condition or event that constitutes a Default or Event of Default (or, in the
case of clauses (i) or (ii), to the extent of any non-compliance, describing
such non-compliance as to which he or she may have knowledge and what action
Borrower has taken, is taking, or proposes to take with respect thereto).
(d) Borrower shall have issued written instructions to its
independent certified public accountants authorizing them to communicate with
Foothill and to release to Foothill whatever financial information concerning
Borrower that Foothill may request and that is in such accountant's possession,
custody or control. Borrower hereby irrevocably authorizes and directs all
auditors, accountants, or other third parties to deliver to Foothill, at
Borrower's expense, copies of Borrower's financial statements, papers related
thereto, and other accounting records of any nature in their possession, and to
disclose to Foothill any information they may have regarding Borrower's business
affairs and financial conditions. In all cases, Foothill shall request that
Borrower obtain and provide such information to Foothill and give Borrower a
reasonable opportunity to so provide same and only if the requested information
is not so provided shall Foothill request such information directly from such
auditors, accountants or other third parties.
6.4 Tax Returns. Deliver to Foothill, within thirty (30) days of the
filing thereof, copies of each of Borrower's future (a) federal income tax
returns, and any amendments and requests for extension relating thereto, filed
with the Internal Revenue Service, (b) commonwealth income tax returns, and any
amendments and requests for extension relating thereto, filed with the
Department of the Treasury, and (c) personal
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property tax returns, and any amendments and requests for extension relating
thereto, filing with any Puerto Rico tax authority.
6.5 Intentionally Omitted.
6.6 Returns. Cause returns and allowances, if any, as between
Borrower and its Account Debtors to be on the same basis and in accordance with
the usual customary practices of Borrower, as they exist at the time of the
execution and delivery of this Agreement. If, at a time when no Event of
Default has occurred and is continuing, any Account Debtor returns any Inventory
to Borrower, Borrower promptly shall determine the reason for such return and,
if Borrower accepts such return, issue a credit memorandum (with a copy to be
sent to Foothill) in the appropriate amount to such Account Debtor. If, at a
time when an Event of Default has occurred and is continuing, any Account Debtor
returns any Inventory to Borrower, Borrower promptly shall determine the reason
for such return and, if Foothill consents (which consent shall not be
unreasonably withheld), issue a credit memorandum (with a copy to be sent to
Foothill) in the appropriate amount to such Account Debtor.
6.7 Title to Equipment. Upon Foothill's reasonable request, Borrower
immediately shall deliver to Foothill, properly endorsed, any and all evidences
of ownership of, certificates of title, or applications for title to any items
of Equipment.
6.8 Maintenance of Equipment. Maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Other than those items
of Equipment that constitute fixtures on the Closing Date (and the required
replacement thereof), Borrower shall not permit any item of Equipment to become
a fixture to real estate or an accession to other property, and such Equipment
shall at all times remain personal property.
6.9 Taxes. Cause all assessments and taxes, whether real, personal,
or otherwise, due or payable by, or imposed, levied, or assessed against
Borrower or any of its property to be paid in full, before delinquency or before
the expiration of any extension period, except to the extent that the validity
of such assessment or tax shall be the subject of a Permitted Protest.
Borrower shall make due and timely payment or deposit of all such federal,
state, commonwealth and local taxes, assessments, or contributions required of
it by law, and will execute and deliver to Foothill, on demand, appropriate
certificates attesting to the payment thereof or deposit with respect thereto.
Borrower will make timely payment or deposit of all tax payments and withholding
taxes required of it by Applicable Laws, including those laws concerning
F.I.C.A., F.U.T.A., state disability,
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and local, commonwealth, state, and federal income taxes, and will upon request
furnish Foothill with proof reasonably satisfactory to Foothill indicating that
Borrower has made such payments or deposits.
6.10 Insurance.
(a) At its expense, keep the Collateral insured against loss or
damage by fire, theft, explosion, sprinklers, and all other hazards and risks,
and in such amounts, as are ordinarily insured against by other owners in
similar businesses. Borrower also shall maintain business interruption, public
liability, product liability, and property damage insurance relating to
Borrower's ownership and use of the Collateral, as well as insurance against
larceny, embezzlement, and criminal misappropriation.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as may be reasonably satisfactory to
Foothill. All insurance required herein shall be written by companies which are
authorized to do insurance business in the State of California. All hazard
insurance and such other insurance as Foothill shall specify, shall contain a
California Form 438BFU (NS) mortgagee endorsement, or an equivalent endorsement
satisfactory to Foothill, showing Foothill as sole loss payee thereof, and shall
contain a waiver of warranties. Every policy of insurance referred to in this
Section 6.10 shall contain an agreement by the insurer that it will not cancel
- ------------
such policy except after thirty (30) days prior written notice to Foothill and
that any loss payable thereunder shall be payable notwithstanding any act or
negligence of Borrower or Foothill which might, absent such agreement, result in
a forfeiture of all or a part of such insurance payment and notwithstanding (i)
occupancy or use of the Collateral for purposes more hazardous than permitted by
the terms of such policy or (ii) any change in title or ownership of the
Collateral. Borrower shall deliver to Foothill certified copies of such policies
of insurance and evidence of the payment of all premiums therefor.
(c) Original policies or certificates thereof satisfactory to
Foothill evidencing such insurance shall be delivered to Foothill at least
thirty (30) days prior to the expiration of the existing or preceding policies.
Borrower shall give Foothill prompt notice of any loss covered by such
insurance, and Foothill shall have the right to adjust any loss. Foothill shall
have the exclusive right to adjust all losses payable under any such insurance
policies without any liability to Borrower whatsoever in respect of such
adjustments. Any monies received as payment for any loss under any insurance
policy including the insurance policies mentioned above, shall be paid over to
Foothill to be applied at the option of Foothill either to the prepayment of the
Obligations without premium, in such order or manner as Foothill may elect, or
shall be disbursed to
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Borrower under stage payment terms satisfactory to Foothill for application to
the cost of repairs, replacements, or restorations. All repairs, replacements,
or restorations shall be effected with reasonable promptness and shall be of a
value at least equal to the value of the items or property destroyed prior to
such damage or destruction. Upon the occurrence of an Event of Default, Foothill
shall have the right to apply all prepaid premiums to the payment of the
Obligations in such order or form as Foothill shall determine.
(d) Borrower shall not take out separate insurance concurrent in
form or contributing in the event of loss with that required to be maintained
under this Section 6.10, unless Foothill is included thereon as named insured
------------
with the loss payable to Foothill under a standard California 438BFU (NS)
Mortgagee endorsement, or its local equivalent. Borrower immediately shall
notify Foothill whenever such separate insurance is taken out, specifying the
insurer thereunder and full particulars as to the policies evidencing the same,
and originals of such policies immediately shall be provided to Foothill.
6.11 No Setoffs or Counterclaims. Make payments hereunder and under
the other Loan Documents by or on behalf of Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.
6.12 Location of Inventory and Equipment. Keep the Inventory and
Equipment only at the locations identified on Schedule 6.12; provided, however,
------------- -------- -------
that Borrower may amend Schedule 6.12 so long as such amendment occurs by
-------------
written notice to Foothill not less than thirty (30) days prior to the date on
which the Inventory or Equipment is moved to such new location, so long as such
new location is within the continental United States or the Commonwealth of
Puerto Rico, and so long as, at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary to perfect and
continue perfected Foothill's security interests in such assets and also
provides to Foothill a Collateral Access Agreement.
6.13 Compliance with Laws. Comply with the requirements of all
Applicable Laws and orders of any governmental authority, including the Fair
Labor Standards Act and the Americans With Disabilities Act, other than laws,
rules, regulations, and orders the non-compliance with which, individually or in
the aggregate, would not have and could not reasonably be expected to result in
a Material Adverse Change.
6.14 Employee Benefits.
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<PAGE>
(a) Promptly, and in any event within ten (10) Business Days
after Borrower or any of its Subsidiaries knows or has reason to know that an
ERISA Event has occurred that reasonably could be expected to result in a
Material Adverse Change, deliver to Foothill a written statement of the chief
financial officer of Borrower describing such ERISA Event and any action that is
being taking with respect thereto by Borrower, any such Subsidiary or ERISA
Affiliate, and any action taken or threatened by the IRS, Department of Labor,
or PBGC. Borrower or such Subsidiary, as applicable, shall (i) be deemed to know
all facts known by the administrator of any Benefit Plan of which it is the plan
sponsor, (ii) promptly, and in any event within three (3) Business Days after
the filing thereof with the IRS, deliver to Foothill a copy of each funding
waiver request filed with respect to any Benefit Plan and all communications
received by Borrower, any of its Subsidiaries or, to the knowledge of Borrower,
any ERISA Affiliate with respect to such request, and (iii) promptly, and in any
event within three (3) Business Days after receipt by Borrower, any of its
Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of the
PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to
administer a Benefit Plan, deliver to Foothill copies of each such notice.
(b) Cause to be delivered to Foothill, upon Foothill's request,
each of the following: (i) a copy of each Plan (or, where any such plan is not
in writing, complete description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of Borrower or its Subsidiaries;
(ii) the most recent determination letter issued by the IRS with respect to each
Benefit Plan; (iii) for the three most recent plan years, annual reports on Form
5500 Series required to be filed with any governmental agency for each Benefit
Plan; (iv) all actuarial reports prepared for the last three plan years for each
Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate
amount of the most recent annual contributions required to be made by Borrower
or any ERISA Affiliate to each such plan and copies of the collective bargaining
agreements requiring such contributions; (vi) any information that has been
provided to Borrower or any ERISA Affiliate regarding withdrawal liability under
any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual
payments made to former employees of Borrower or its Subsidiaries under any
Retiree Health Plan.
6.15 Leases. Pay when due all rents and other amounts payable under
any leases to which Borrower is a party or by which Borrower's properties and
assets are bound, unless such payments are the subject of a Permitted Protest.
To the extent that Borrower fails timely to make payment of such rents and other
amounts payable when due
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under its leases, Foothill shall be entitled, in its discretion, to reserve an
amount equal to such unpaid amounts against the Borrowing Base.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, Borrower
will not do any of the following without Foothill's prior written consent :
7.1 Indebtedness. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness evidenced by this Agreement;
(b) Indebtedness set forth on Schedule 7.1 and in existence on
------------
the Closing Date;
(c) Indebtedness secured by the Liens described in clauses (b)
through (i) of the definition of Permitted Liens;
(d) Intentionally Omitted;
(e) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b), (c) and (g) of this Section 7.1 (and continuance or
-----------
renewal of any Permitted Liens associated therewith) so long as: (i) the terms
and conditions of such refinancings, renewals, or extensions do not materially
impair the prospects of repayment of the Obligations by Borrower, (ii) the net
cash proceeds of such refinancings, renewals, or extensions do not result in an
increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Foothill as those applicable to
the refinanced Indebtedness;
(f) (i) Indebtedness permitted by Section 7.6 of this Agreement,
-----------
(ii) Indebtedness to Cortelco International, Inc. in an aggregate amount not to
exceed $250,000 outstanding at any time, and (iii) Indebtedness to Parent
pursuant to that certain Promissory Note dated August 19, 1992, in the original
principal amount of $750,000 (the "Parent Note");
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(g) Indebtedness pursuant to the First Bank Mortgage in an
aggregate principal amount not to exceed $4,600,000.
7.2 Liens. Create, incur, assume, or permit to exist, directly or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(e) and so long as the replacement Liens only encumber those assets
- --------------
or property that secured the original Indebtedness).
7.3 Restrictions on Fundamental Changes. Enter into any merger,
consolidation, or reorganization, or any recapitalization or reclassification of
its capital stock, or liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of transactions, all or any
substantial part of its property or assets.
7.4 Sale or Disposal of Assets. Sell, lease, assign, transfer, or
otherwise dispose of any of Borrower's properties or assets other than (a) the
sale of Inventory in the ordinary course of Borrower's business and (b) physical
assets disposed of or replaced in the ordinary course of Borrower's business as
currently conducted and in an aggregate amount not exceeding $100,000 during any
fiscal year.
7.5 Change Name. Change Borrower's name, FEIN, corporate structure,
or identity, or add any new fictitious name.
7.6 Guarantee. Guarantee or otherwise become in any way liable with
respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Foothill.
7.7 Nature of Business. Make any change in the principal nature of
Borrower's business.
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7.8 Repayments, Prepayments and Amendments.
(a) Make any payment on the Parent Note or the Alcatel Debt;
provided, however, if no Default or Event of Default then exists or would be
caused thereby, Borrower may make payments of principal and accrued interest on
the Parent Note and the Alcatel Debt if (i) after giving effect to such payments
and of other Advances to be made hereunder on such date, Borrower shall have
borrowing availability hereunder of not less than $200,000, (ii) the aggregate
amount of all principal payments on the Parent Note made by Borrower during the
term of this Agreement does not exceed $750,000, (iii) the aggregate amount of
all principal payments on the Alcatel Debt (whether made directly to Alcatel or
via a distribution to Parent) during the term of this Agreement does not exceed
$250,000, and (iv) all payments by Borrower to the Parent on account of the
Parent Note are used by Parent to repay the Alcatel Debt;
(b) Except in connection with a refinancing permitted by Section
-------
7.1(e), prepay, redeem, retire, defease, purchase, or otherwise acquire any
- ------
Indebtedness owing to any third Person, other than the Obligations in accordance
with this Agreement; and
(c) Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of any agreement, instrument, document,
indenture, or other writing evidencing or concerning Indebtedness permitted
under Sections 7.1(b), (c), (d), (e) or (f)(iii).
------------------------------------------
7.9 Change of Control. Cause, permit, or suffer, directly or
indirectly, any Change of Control, except, with the prior written consent of
Foothill (and if no Event of Default then exists, which consent shall not be
unreasonably withheld), in connection with the conversion of Indebtedness of
Borrower into equity securities of Borrower or other recapitalization of the
stock of Borrower.
7.10 Consignments. At any time, consign any Inventory or sell any
Inventory on bill and hold, sale or return, sale on approval, or other
conditional terms of sale.
7.11 Distributions. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding; provided, however, so long as no Default
or Event of Default then exists or would be caused thereby, if Borrower's
financial performance is equal to or better than that set forth in the
Projections, Borrower may, in any fiscal year, make distributions to
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<PAGE>
Parent for payment of corporate overhead which, together with all distributions
made to Parent during such fiscal year by Borrower, Cortelco Systems, Inc. and
Cortelco International, Inc., do not exceed in the aggregate $750,000.
Additionally, Borrower may make distributions to Parent for payment of the
Alcatel Debt to the extent such payment is permitted by Section 7.8(a).
7.12 Accounting Methods. Modify or change its method of accounting or
enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting records without
said accounting firm or service bureau agreeing to provide Foothill information
regarding the Collateral or Borrower's financial condition. Borrower waives the
right to assert a confidential relationship, if any, it may have with any
accounting firm or service bureau in connection with any information requested
by Foothill pursuant to or in accordance with this Agreement, and agrees that
Foothill may contact directly any such accounting firm or service bureau in
order to obtain such information.
7.13 Investments. Except as permitted by Section 7.14 or as disclosed
on Schedule 7.13 and except for investments of the type described in clauses (a)
-------------
and (b) below which do not exceed $100,000 in an aggregate at any time owned by
Borrower, directly or indirectly (a) make or acquire, or incur any liabilities
(including contingent obligations) for or in connection with, any loan or
advance to, or capital contribution in, any Person, (b) acquire the securities
(whether debt or equity) of, or other interests in, any Person, or (c) acquire
all or substantially all of the properties or assets of a Person.
7.14 Transactions with Affiliates. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms, that are fully disclosed to Foothill, and that
are no less favorable to Borrower than would be obtained in an arm's length
transaction with a non-Affiliate. Additionally, other than as permitted by
Sections 7.8(a) or 7.11 hereof, Borrower shall not make any loan or advance or
- ------------------------
otherwise transfer any funds (whether pursuant to an accounting entry on
Borrower's or Parent's books or otherwise) to an Affiliate without the prior
written consent of Foothill; provided, Borrower may make loans or advances to
Cortelco International, Inc. in an aggregate amount not to exceed $250,000
outstanding at any time.
7.15 Suspension. Suspend or go out of a substantial portion of its
business.
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<PAGE>
7.16 Compensation. Increase the annual fee or per-meeting fees paid to
directors during any year by more than twenty-five percent (25%) over the prior
year; or pay or accrue total cash compensation, during any year, to officers and
senior management employees appointed or employed as of the Closing Date in an
aggregate amount in excess of 120% of that paid or accrued in the prior year.
Borrower shall not pay or accrue total cash compensation, during any year, to
officers and senior management employees that are appointed or initially
employed after the Closing Date in an amount in excess of that which is
customary in Borrower's industry and consistent with Borrower's past business
practices.
7.17 Use of Proceeds. Use the proceeds of the Advances made hereunder
for any purpose other than (a) on the Closing Date, (i) to repay in full the
outstanding principal, accrued interest, and accrued fees and expenses owing to
Existing Lender, and (ii) to pay transactional costs and expenses incurred in
connection with this Agreement, and (b) thereafter, consistent with the terms
and conditions hereof, for its lawful and permitted corporate purposes.
7.18 Change in Location of Chief Executive Office; Inventory and
Equipment with Bailees. Relocate its chief executive office to a new location
without providing thirty (30) days prior written notification thereof to
Foothill and so long as, at the time of such written notification, Borrower
provides any notice of lien filings, financing statements, mortgages or other
agreements necessary to perfect and continue perfected Foothill's security
interests and also provides to Foothill a Collateral Access Agreement with
respect to such new location. The Inventory and Equipment shall not at any time
now or hereafter be stored with a bailee, warehouseman, or similar party without
Foothill's prior written consent.
7.19 No Prohibited Transactions Under ERISA. Directly or indirectly:
(a) engage, or permit any Subsidiary of Borrower to engage, in
any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;
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<PAGE>
(c) fail, or permit any Subsidiary of Borrower to fail, to pay
timely required contributions or annual installments due with respect to any
waived funding deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary of Borrower to terminate,
any Benefit Plan where such event would result in any liability of Borrower, any
of its Subsidiaries or any ERISA Affiliate under Title IV of ERISA;
(e) fail, or permit any Subsidiary of Borrower to fail, to make
any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of Borrower to fail, to pay
any required installment or any other payment required under Section 412 of the
IRC on or before the due date for such installment or other payment;
(g) amend, or permit any Subsidiary of Borrower to amend, a Plan
resulting in an increase in current liability for the plan year such that either
of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is required to
provide security to such Plan under Section 401(a)(29) of the IRC; or
(h) withdraw, or permit any Subsidiary of Borrower to withdraw,
from any Multiemployer Plan where such withdrawal is reasonably likely to result
in any liability of any such entity under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $100,000.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when declared
due and payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the provisions of the Bankruptcy Code,
would have accrued on such amounts), fees and charges due Foothill,
reimbursement of Foothill Expenses, or other amounts constituting Obligations);
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8.2 If Borrower fails or neglects to perform, keep, or observe any
term, provision, condition, covenant, or agreement contained in Sections 2, 4, 6
----------------
(other than subsections 6.4, 6.8, 6.13, 6.14 or 6.15), or 7 of this Agreement;
-------------------------------- ---- -
8.3 If Borrower fails or neglects to perform, keep, or observe any
term, provision, condition, covenant, or agreement contained in subsections 6.4,
----------------
6.8, 6.13, 6.14 or 6.15, or any other section of this Agreement not referenced
- --------------- ----
elsewhere in this Section 8, or in any of the Loan Documents, or in any other
---------
present or future agreement between Borrower and Foothill and such failure is
not cured or remedied within five (5) days;
8.4 If there is a Material Adverse Change;
8.5 If any material portion of Borrower's properties or assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any third Person;
8.6 If an Insolvency Proceeding is commenced by Borrower;
8.7 If an Insolvency Proceeding is commenced against Borrower and any
of the following events occur: (a) Borrower consents to the institution of the
Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within forty-five (45) calendar days of
the date of the filing thereof; provided, however, that, during the pendency of
-------- -------
such period, Foothill shall be relieved of its obligation to extend credit
hereunder; (d) an interim trustee is appointed to take possession of all or a
substantial portion of the properties or assets of, or to operate all or any
substantial portion of the business of, Borrower; or (e) an order for relief
shall have been issued or entered therein;
8.8 If Borrower is enjoined, restrained, or in any way prevented by
court order from continuing to conduct all or any material part of its business
affairs;
8.9 If a notice of Lien, levy, or assessment is filed of record with
respect to any of Borrower's properties or assets having an aggregate value in
excess of $200,000 by the United States government or the Puerto Rico
government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, or if any taxes or debts owing
at any time hereafter to any one or more of such entities becomes a Lien,
whether choate or otherwise, upon any of Borrower's properties or assets and the
same is not paid on the payment date thereof (Borrower expressly acknowledges
that Foothill may establish a reserve for the amount
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of any Lien of any governmental authority filed with respect to or affecting any
of the Collateral);
8.10 If a judgment or other claim becomes a Lien or encumbrance upon
any material portion of Borrower's properties or assets;
8.11 If there is a default in any material agreement to which Borrower
is a party with one or more third Persons and such default (a) occurs at the
final maturity of the obligations thereunder, or (b) results in a right by such
third Person(s), irrespective of whether exercised, to accelerate the maturity
of Borrower's obligations thereunder;
8.12 If Borrower makes any payment on account of Indebtedness that has
been contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is expressly permitted hereunder
and by the terms of the subordination provisions applicable to such
Indebtedness;
8.13 If any material misstatement or misrepresentation exists now or
hereafter in any warranty, representation, statement, or report made to Foothill
by Borrower or any officer, employee, agent, or director of Borrower, or if any
such warranty or representation is withdrawn;
8.14 If the obligation of any guarantor under its guaranty or other
third Person under any Loan Document is limited or terminated by operation of
law or by the guarantor or other third Person thereunder, or any such guarantor
or other third Person becomes the subject of an Insolvency Proceeding; or
8.15 If any Event of Default (as defined in the CII Loan Agreement)
occurs under the CII Loan Agreement.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable;
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(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, under any of the Loan Documents, or
under any other agreement between Borrower and Foothill;
(c) Terminate this Agreement and any of the other Loan Documents
as to any future liability or obligation of Foothill, but without affecting
Foothill's rights and security interests in the Collateral and without affecting
the Obligations;
(d) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Foothill considers advisable, and in
such cases, Foothill will credit Borrower's Loan Account with only the net
amounts received by Foothill in payment of such disputed Accounts after
deducting all Foothill Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in trust for
Foothill, segregate all returned Inventory from all other property of Borrower
or in Borrower's possession and conspicuously label said returned Inventory as
the property of Foothill;
(f) Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Foothill considers necessary or
reasonable to protect its security interests in the Collateral. Borrower agrees
to assemble the Collateral if Foothill so requires, and to make the Collateral
available to Foothill as Foothill may designate. Borrower authorizes Foothill to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or Lien that in Foothill's determination
appears to conflict with its security interests and to pay all expenses incurred
in connection therewith. With respect to any of Borrower's owned or leased
premises, Borrower hereby grants Foothill a license to enter into possession of
such premises and to occupy the same, without charge, for up to one hundred
twenty (120) days in order to exercise any of Foothill's rights or remedies
provided herein, at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation, set off and apply to the Obligations any and all (i) balances
and deposits of Borrower held by Foothill (including any amounts received in the
Lockbox Accounts), or (ii) indebtedness at any time owing to or for the credit
or the account of Borrower held by Foothill;
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(h) Hold, as cash collateral, any and all balances and deposits
of Borrower held by Foothill, and any amounts received in the Lockbox Accounts,
to secure the full and final repayment of all of the Obligations;
(i) Seek the appointment of a receiver or keeper to take
possession of the Collateral and to enforce any of Foothill's remedies with
respect to such appointment without prior notice or hearing;
(j) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Foothill is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and Borrower's rights under all licenses and all franchise agreements shall
inure to Foothill's benefit;
(k) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Foothill
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(l) Foothill shall give notice of the disposition of the
Collateral as follows:
(1) Foothill shall give Borrower and each holder of a
security interest in the Collateral who has filed with Foothill a written
request for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than a public
sale is to be made of the Collateral, then the time on or after which the
private sale or other disposition is to be made;
(2) The notice shall be personally delivered or mailed,
postage prepaid, to Borrower as provided in Section 12, at least five (5) days
----------
before the date fixed for the sale, or at least five (5) days before the date on
or after which the private sale or other disposition is to be made; no notice
needs to be given prior to the disposition of any portion of the Collateral that
is perishable or threatens to decline speedily in value or that is of a type
customarily sold on a recognized market. Notice to Persons other than Borrower
claiming an interest in the Collateral shall be sent to such addresses as they
have furnished to Foothill;
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(3) If the sale is to be a public sale, Foothill also shall
give notice of the time and place by publishing a notice one time at least five
(5) days before the date of the sale in a newspaper of general circulation in
the county in which the sale is to be held;
(m) Foothill may credit bid and purchase at any public sale;
(n) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Foothill to Borrower; and
(o) Borrower hereby acknowledges that the Obligations arose out
of a commercial transaction, and agrees that if an Event of Default shall occur
Foothill shall have the right to an immediate writ of possession without notice
of a hearing. Foothill shall have the right to the appointment of a receiver for
the Collateral, and Borrower hereby consents to such rights and such appointment
and hereby waives any objection Borrower may have thereto or the right to have a
bond or other security posted by Foothill in connection therewith.
9.2 Remedies Cumulative. Foothill's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Foothill shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Foothill of one
right or remedy shall be deemed an election, and no waiver by Foothill of any
Event of Default shall be deemed a continuing waiver. No delay by Foothill
shall constitute a waiver, election, or acquiescence by it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums, or, in the case of leased properties or assets, rents or
other amounts payable under such leases) due to third Persons, or fails to make
any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure by Borrower could result in a Material Adverse
Change, in its discretion and without prior notice to Borrower,
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<PAGE>
Foothill may do any or all of the following: (a) make payment of the same or any
part thereof; (b) set up such reserves in Borrower's Loan Account as Foothill
deems necessary to protect Foothill from the exposure created by such failure;
or (c) obtain and maintain insurance policies of the type described in Section
-------
6.10, and take any action with respect to such policies as Foothill deems
- ----
prudent. Any such amounts paid by Foothill shall constitute Foothill Expenses.
Any such payments made by Foothill shall not constitute an agreement by Foothill
to make similar payments in the future or a waiver by Foothill of any Event of
Default under this Agreement. Foothill need not inquire as to, or contest the
validity of, any such expense, tax, or Lien and the receipt of the usual
official notice for the payment thereof shall be conclusive evidence that the
same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which Borrower may in any way be liable.
11.2 Foothill's Liability for Collateral. So long as Foothill uses
reasonable care in the custody and preservation of Collateral in its possession,
Foothill shall not in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the value
thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other Person. All risk of loss, damage, or destruction of
the Collateral shall be borne by Borrower.
11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold
Foothill, and each of its officers, directors, employees, counsel, agents, and
attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest
extent permitted by law) from and against any and all claims, demands, suits,
actions, investigations, proceedings, and damages, and all reasonable attorneys
fees and disbursements and other costs and expenses actually incurred in
connection therewith (as and when they are incurred and irrespective of whether
suit is brought), at any time asserted against, imposed upon, or incurred by any
of them in connection with or as a result of or related to the execution,
delivery, enforcement, performance, and administration of this Agreement and any
other Loan Documents or the transactions contemplated herein, and with respect
to any investigation, litigation, or proceeding related to this Agreement, any
other Loan Document, or the use
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<PAGE>
of the proceeds of the credit provided hereunder (irrespective of whether any
Indemnified Person is a party thereto), or any act, omission, event or
circumstance in any manner related thereto (all the foregoing, collectively, the
"Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified
Person under this Section 11.3 for consequential damages or with respect to any
------------
Indemnified Liability that a court of competent jurisdiction finally determines
to have resulted from the gross negligence or willful misconduct of such
Indemnified Person. This provision shall survive the termination of this
Agreement and the repayment of the Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other Loan Document shall be in
writing and (except for financial statements and other informational documents
which may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail (postage prepaid, return
receipt requested), overnight courier, or telefacsimile to Borrower or to
Foothill, as the case may be, at its address set forth below:
If to Borrower: CORTELCO PUERTO RICO, INC.
1550 Ponce de Leon Avenue
San Juan, Puerto Rico 00926
Attn: Edwin J. Colberg
Fax No. 787-281-1740
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<PAGE>
and, only in connection
------------------
with a notice under
-------------------
Section 8 or 9 hereof,
---------------------
with a copy to: Baker, Donelson, Bearman &
Caldwell
165 Madison Avenue, 20th Floor
Memphis, Tennessee 38103
Attn: Charles T. Tuggle, Jr., Esq.
Fax No. 901-577-2303
and Nevares, Sachez-Alvarez & Gonzalez-Nieto
53 Palmeras Street
Suite 401
San Juan, Puerto Rico 0091-2408
Attn: Francisco Gonzalez-Nieto
Fax No.: 787-724-4446
and Cortelco Systems Holding Corp.
4119 Willow Lake Boulevard
Memphis, Tennessee 38118
Attn: James D. Finn
Fax No.: 901-795-0352
If to Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. (310) 478-9788
with a copy to: Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street, NE, Suite 2400
Atlanta, Georgia 30308
Attn: Jesse H. Austin, III, Esq.
Fax No. (404) 815-2424
The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other. All
notices or demands
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<PAGE>
sent in accordance with this Section 12, shall be deemed received on the earlier
----------
of the date of actual receipt or three (3) days after the deposit thereof in the
mail.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN AN ANOTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS
OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER
OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PUERTO
RICO. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION
WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED
ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COMMONWEALTH OF PUERTO RICO
OR IN THE COUNTY OF FULTON, STATE OF GEORGIA OR, AT THE SOLE OPTION OF FOOTHILL,
IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE
PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED
UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM
NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 13. TO THE EXTENT PERMITTED BY APPLICABLE LAW,
----------
BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED
THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY
OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
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<PAGE>
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers delivered
to Foothill may be destroyed or otherwise disposed of by Foothill four (4)
months after they are delivered to or received by Foothill, unless Borrower
requests, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 Effectiveness. This Agreement shall be binding and deemed
effective when executed by Borrower and Foothill.
15.2 Successors and Assigns. This Agreement shall bind and inure to
the benefit of the respective successors and assigns of each of the parties;
provided, however, that Borrower may not assign this Agreement or any rights or
- -------- -------
duties hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Foothill
shall release Borrower from its Obligations. Foothill may assign this Agreement
and its rights and duties hereunder to an Affiliate of Foothill or in connection
with a bulk sale of its portfolio of financial accommodations and no consent or
approval by Borrower is required in connection with any such assignment. No
other assignment (except as set forth in the next sentence) by Foothill shall be
permitted without the consent of Borrower, which consent shall not be
unreasonably withheld or delayed. Foothill reserves the right to sell syndicated
interests in and/or grant participations in all or any part of, or in any
interest in Foothill's rights and benefits hereunder. In connection with any
such assignment, sale of a syndicated interest or participation, Foothill may
disclose all documents and information which Foothill now or hereafter may have
relating to Borrower or Borrower's business. To the extent that Foothill
assigns its rights and obligations hereunder to a third Person, Foothill
thereafter shall be released from such assigned obligations to Borrower and such
assignment shall effect a novation between Borrower and such third Person.
15.3 Section Headings. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
15.4 Interpretation. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Foothill or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been
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<PAGE>
reviewed by all parties and shall be construed and interpreted according to the
ordinary meaning of the words used so as to fairly accomplish the purposes and
intentions of all parties hereto.
15.5 Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
15.6 Amendments in Writing. This Agreement can only be amended by a
writing signed by both Foothill and Borrower.
15.7 Counterparts; Telefacsimile Execution. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.
15.8 Revival and Reinstatement of Obligations. If the incurrence or
payment of the Obligations by Borrower or any guarantor of the Obligations or
the transfer by either or both of such parties to Foothill of any property of
either or both of such parties should for any reason subsequently be declared to
be void or voidable under any state or federal law relating to creditors'
rights, including provisions of the Bankruptcy Code relating to fraudulent
conveyances, preferences, and other voidable or recoverable payments of money or
transfers of property (collectively, a "Voidable Transfer"), and if Foothill is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of Foothill related thereto, the liability of Borrower or such
guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.
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<PAGE>
15.9 Integration. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
15.10 Time of the Essence. Time is of the essence of this Agreement.
[The Remainder of this Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed under seal in San Juan, Puerto Rico.
CORTELCO PUERTO RICO, INC.,
a corporation organized under the laws
of Puerto Rico
By: /s/ Edwin Colberg
--------------------------------------------
Name: Edwin Colberg
------------------------------------------
Title: Vice President and General Manager
----------------------------------------- (SEAL)
FOOTHILL CAPITAL CORPORATION,
a California corporation, with an office in
Atlanta, Georgia
By: /s/ Rhonda R. Foreman
--------------------------------------------
Name: Rhonda R. Foreman
------------------------------------------
Title: Vice President
-----------------------------------------
<PAGE>
<TABLE>
<CAPTION>
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NAME
----
STATE FOOTHILL OF AMOUNT
----- -------- -- ------
FACILITY AND ZIP LIEN PRIOR OF PRIOR
- -------- ------- ---- ----- --------
NAME ADDRESS CITY COUNTY CODE POSITION LIENOR LIEN
- ---- ------- ---- ------- ---- -------- ------ ----
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
===============================================================================================
</TABLE>
<PAGE>
Exhibit 10.6
PROMISSORY NOTE
Principal amount: $1,300,000 Date: April 13, 1999
For value received CORTELCO SYSTEMS HOLDING CORP., a Delaware corporation
("Borrower"), hereby promises to pay to BCS TECHNOLOGIES, INC. or its assigns
("Holder") in immediately available funds, the principal sum of $1,300,000 (the
"Loan") with interest on the unpaid principal balance of this note (the "Note")
at the rate set forth below, from the date of this Note until this Note is paid
in full.
1. Principal Repayment. The outstanding principal amount of the Loan
-------------------
shall be due and payable on demand after September 15, 1999. Each payment shall
be credited first to accrued interest, then to unpaid principal, and interest
shall then cease on the portion of principal credited. All payments shall be
made in lawful money of the United States of America, without offset, deduction
or counterclaim of any kind.
2. Interest Rate. Borrower further promises to pay interest in the
-------------
outstanding principal amount hereof from the date hereof until payment in full,
which interest shall be payable at the rate per annum equal to the prime rate
plus one and one-half percent (prime + 1.5%). Accrued interest shall be computed
on the basis of a 365-day year, based on the actual number of days elapsed.
3. Place of Payment. All amounts payable hereunder shall be payable at
----------------
the office of Holder, 8400 E. Prentice Avenue, #1320, Englewood, Colorado, or
such other place as Holder may from time to time designate in writing.
4. Prepayment. Borrower may prepay this Note, in whole or part, on any
----------
date, without premium or penalty. Any partial payment shall be credited first to
accrued interest, and thereafter to the outstanding principal balance hereof.
Prepayments shall then be applied to the next principal payment that becomes
due.
5. Default. In the event hereunder, borrower shall pay all reasonable
-------
attorneys' fees and court costs incurred by Holder in enforcing and collecting
this note.
6. Successors and Assigns. This Note shall inure to the benefit of and
----------------------
be enforceable by Holder, its successors and assigns, and shall be binding upon
and enforceable against Borrower and its successors and assigns, provided that
neither party shall have the right to assign any rights or obligations hereunder
without the express written consent of the other.
7. Waiver; Representations. Presentment for payment, demand, notice of
-----------------------
dishonor, protest, notice of protest, stay of execution and all other defenses
to payment generally and notices in connection with the delivery, acceptance,
performance, default or enforcement of the payment of this Note are hereby
waived by Borrower and its successors and assigns.
8. Waivers and Amendments. Neither this Note nor any provision hereof
----------------------
may be changed, waived, discharged, terminated, modified or amended except upon
the written consent of Borrower and Holder.
9. Headings. The headings of the various sections of this Note have been
--------
inserted for convenience of reference only and shall not be deemed to be part of
this Note.
10. Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of Colorado.
11. Entire Agreement. This Note constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
12. Payment of Fees and Expenses. If any action at law or in equity is
----------------------------
necessary to enforce or interpret the terms of this Note, the prevailing party
shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
1.
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered as of the date first written above.
Borrower: Cortelco Systems Holding Corp.
By: /s/ Stephen R. Bowling
-------------------------------
Stephen R. Bowling
President
Agreed to and accepted:
Holder: BCS Technologies, Inc.
By: /s/ David M. Fredrick
------------------------------
David M. Fredrick
VP & General Manager of ACD
Operations
2.
<PAGE>
EXHIBIT 10.7
FORM OF
INDEMNITY AGREEMENT
This INDEMNITY AGREEMENT is made and entered into as of __________________,
1999, by and between CORTELCO SYSTEMS, INC., a Delaware corporation (the
"Corporation"), and _______________ ("Agent").
RECITALS
WHEREAS, Agent performs a valuable service to the Corporation in the
capacity as _____________ of the Corporation;
WHEREAS, the stockholders of the Corporation have adopted bylaws (the
"Bylaws") providing for the indemnification of the directors, executive officers
and certain other officers, employees and other agents of the Corporation,
including persons serving at the request of the Corporation in such capacities
with other corporations or enterprises, as authorized by the Delaware General
Corporation Law, as amended (the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit
contracts between the Corporation and its directors, executive officers, other
officers, employees and other agents with respect to indemnification of such
persons; and
WHEREAS, in order to induce Agent to continue to serve as _______________
of the Corporation, the Corporation has determined and agreed to enter into this
Agreement with Agent;
NOW, THEREFORE, in consideration of Agent's continued service as
_______________ after the date hereof, the parties hereto agree as follows:
AGREEMENT
1. SERVICES TO THE CORPORATION. Agent will serve, at the will of the
Corporation or under separate contract, if any such contract exists, as
____________ of the Corporation or as a director, executive officer, other
officer or other fiduciary of an affiliate of the Corporation faithfully and to
the best of Agent's ability so long as Agent is duly elected and qualified in
accordance with the provisions of the Bylaws or other applicable charter
documents of the Corporation or such affiliate; provided, however, that Agent
may at any time and for any reason resign from such position (subject to any
contractual obligation that Agent may have assumed apart from this Agreement)
and that the Corporation or any affiliate shall have no obligation under this
Agreement to continue Agent in any such position.
2. INDEMNITY OF AGENT. The Corporation hereby agrees to hold harmless
and indemnify Agent to the fullest extent authorized or permitted by the
provisions of the Bylaws and the Code, as the same may be amended from time to
time (but, only to the extent that such
1.
<PAGE>
amendment permits the Corporation to provide broader indemnification rights than
the Bylaws or the Code permitted prior to adoption of such amendment).
3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the
indemnification otherwise provided for herein, and subject only to the
exclusions set forth in Section 4 hereof, the Corporation hereby further agrees
to hold harmless and indemnify Agent:
(A) against any and all expenses (including attorneys' fees), witness
fees, damages, judgments, fines and amounts paid in settlement and any other
amounts that Agent becomes legally obligated to pay by reason of any claim or
claims made against or by Agent in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative (including an action by or in the right of the
Corporation) to which Agent is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Agent is, was or at
any time becomes a director, officer, employee or other agent of Corporation, or
is or was serving or at any time serves at the request of the Corporation as a
director, officer, employee or other agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise; and
(B) otherwise to the fullest extent as may be provided to Agent by
the Corporation under the non-exclusivity provisions of the Code and Section 42
of the Bylaws.
4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section
3 hereof shall be paid by the Corporation:
(A) on account of any claim against Agent for an accounting of
profits made from the purchase or sale by Agent of securities of the Corporation
pursuant to the provisions of Section 16(b) of the Securities Exchange Act of
1934 and amendments thereto or similar provisions of any federal, state or local
statutory law;
(B) on account of Agent's conduct that was knowingly fraudulent or
deliberately dishonest or that constituted willful misconduct;
(C) on account of Agent's conduct that constituted a breach of
Agent's duty of loyalty to the Corporation or resulted in any personal profit or
advantage to which Agent was not legally entitled;
(D) for which payment actually is made to Agent under a valid and
collectible insurance policy or under a valid and enforceable indemnity clause,
bylaw or agreement, except in respect of any excess beyond payment under such
insurance, clause, bylaw or agreement;
(E) if indemnification is not lawful (and, in this respect, both the
Corporation and Agent have been advised that the Securities and Exchange
Commission believes that indemnification for liabilities arising under the
federal securities laws is against public policy and therefore is unenforceable
and that claims for indemnification should be submitted to appropriate courts
for adjudication); or
(F) in connection with any proceeding (or part thereof) initiated by
Agent, or any proceeding by Agent against the Corporation or its directors,
executive officers, other
2.
<PAGE>
officers, employees or other agents, unless (i) such indemnification expressly
is required to be made by law, (ii) the proceeding was authorized by the Board
of Directors of the Corporation, (iii) such indemnification is provided by the
Corporation, in its sole discretion, pursuant to the powers vested in the
Corporation under the Code, or (iv) the proceeding is initiated pursuant to
Section 9 hereof.
5. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Agent is a
director, officer, employee or other agent of the Corporation (or is or was
serving at the request of the Corporation as a director, officer, employee or
other agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise) and shall continue thereafter so long as Agent
shall be subject to any possible claim or threatened, pending or completed
action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Agent was serving in
the capacity referred to herein.
6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this Agreement
to indemnification by the Corporation for a portion of the expenses (including
attorneys' fees), witness fees, damages, judgments, fines and amounts paid in
settlement and any other amounts that Agent becomes legally obligated to pay in
connection with any action, suit or proceeding referred to in Section 3 hereof
even if not entitled hereunder to indemnification for the total amount thereof,
and the Corporation shall indemnify Agent for the portion thereof to which Agent
is entitled.
7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days
after receipt by Agent of notice of the commencement of any action, suit or
proceeding, Agent will, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Corporation of the commencement
thereof; but the omission so to notify the Corporation will not relieve it from
any liability which it may have to Agent otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Agent notifies
the Corporation of the commencement thereof:
(A) the Corporation will be entitled to participate therein at its
own expense;
(B) except as otherwise provided below, the Corporation may, at its
option and jointly with any other indemnifying party similarly notified and
electing to assume such defense, assume the defense thereof, with counsel
reasonably satisfactory to Agent. After notice from the Corporation to Agent of
its election to assume the defense thereof, the Corporation will not be liable
to Agent under this Agreement for any legal or other expenses subsequently
incurred by Agent in connection with the defense thereof except for reasonable
costs of investigation or otherwise as provided below. Agent shall have the
right to employ separate counsel in such action, suit or proceeding but the fees
and expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of Agent; provided,
however, that the fees and expenses of Agent's separate counsel shall be borne
by the Corporation if (i) the employment of counsel by Agent has been authorized
by the Corporation, (ii) Agent reasonably shall have concluded that there may be
a conflict of interest between the Corporation and Agent in the conduct of the
defense of such action or (iii) the Corporation in fact shall not have employed
counsel to assume the defense of such action. The
3.
<PAGE>
Corporation shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Corporation or as to which Agent shall
have made the conclusion provided for in clause (ii) above; and
(C) the Corporation shall not be liable to indemnify Agent under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent, which shall not be unreasonably withheld. The
Corporation shall be permitted to settle any action except that it shall not
settle any action or claim in any manner which would impose any penalty or
limitation on Agent without Agent's written consent, which may be given or
withheld in Agent's sole discretion.
8. EXPENSES. Promptly following request therefor, the Corporation shall
advance, prior to the final disposition of any proceeding, all expenses incurred
by Agent in connection with such proceeding upon receipt of an undertaking by or
on behalf of Agent to repay such amounts if it shall be determined ultimately
that Agent is not entitled to be indemnified under the provisions of this
Agreement, the Bylaws, the Code or otherwise.
9. ENFORCEMENT. Any right to indemnification or advances granted by this
Agreement to Agent shall be enforceable by or on behalf of Agent in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
90 days of request therefor. Agent, in such enforcement action, if successful
in whole or in part, also shall be entitled to be paid the expense of
prosecuting Agent's claim. It shall be a defense to any action for which a
claim for indemnification is made under Section 3 hereof (other than an action
brought to enforce a claim for expenses pursuant to Section 8 hereof, provided
that the required undertaking has been tendered to the Corporation) that Agent
is not entitled to indemnification because of the limitations set forth in
Section 4 hereof. Neither the failure of the Corporation (including its Board
of Directors or its stockholders) to have made a determination prior to the
commencement of such enforcement action that indemnification of Agent is proper
in the circumstances, nor an actual determination by the Corporation (including
its Board of Directors or its stockholders) that such indemnification is
improper shall be a defense to the action or create a presumption that Agent is
not entitled to indemnification under this Agreement or otherwise.
10. SUBROGATION. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Agent, who shall execute all documents required and shall
do all acts that may be necessary to secure such rights and to enable the
Corporation effectively to bring suit to enforce such rights.
11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this
Agreement shall not be exclusive of any other right Agent may have or hereafter
acquire under any statute, provision of the Corporation's Certificate of
Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in Agent's official capacity and as to action in
another capacity while holding office.
4.
<PAGE>
12. SURVIVAL OF RIGHTS.
(A) The rights conferred on Agent by this Agreement shall continue
after Agent has ceased to be a director, officer, employee or other agent of the
Corporation or to serve at the request of the Corporation as a director,
officer, employee or other agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and shall inure to the
benefit of Agent's heirs, executors and administrators.
(B) The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Corporation, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Corporation would be required to perform if no such succession
had taken place.
13. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid for any reason, such invalidity contained
herein or unenforceability shall not affect the validity or enforceability of
the other provisions hereof. Furthermore, if this Agreement shall be
invalidated in its entirety on any ground, then the Corporation nevertheless
shall indemnify Agent to the fullest extent provided by the Bylaws, the Code or
any other applicable law.
14. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware.
15. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless signed in writing by
both parties hereto.
16. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed for all purposes to be an original
but all of which together shall constitute this Agreement.
17. HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction hereof.
18. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i)
upon delivery if delivered by hand to the party to whom such communication was
directed or (ii) upon the third business day after the date on which such
communication was mailed if mailed by certified or registered mail with postage
prepaid:
(A) If to Agent, at the address indicated on the signature page
hereof.
(B) If to the Corporation, to
Cortelco Systems, Inc.
4119 Willow Lake Blvd.
Memphis, TN 38118
5.
<PAGE>
or to such other address as may have been furnished to Agent by the Corporation.
6.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the date set forth above in the first paragraph hereof.
CORTELCO SYSTEMS, INC.
Signature:________________________________
Print Name:_______________________________
Title:____________________________________
AGENT
Signature:________________________________
Print Name:_______________________________
Address:__________________________________
__________________________________________
[Indemnity Agreement Signature Page]
<PAGE>
EXHIBIT 10.8
MANUFACTURING AGREEMENT
between
CORTELCO SYSTEMS, INC.
and
CMC MANUFACTURING, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I PARTIES TO THE AGREEMENT........................................... 1
Section 1. Manufacturing Agreement.................................. 1
PART II PERFORMANCE........................................................ 1
Section 2. Orders and Delivery...................................... 1
Section 3. Description of Work...................................... 1
Section 4. Price.................................................... 2
Section 5. Ordering................................................. 2
Section 6. Manufacturing............................................ 3
Section 7. Tooling.................................................. 3
Section 8. Packaging................................................ 4
Section 9. Warranties............................................... 4
Section 10. Delivery................................................. 4
Section 11. Title.................................................... 4
Section 12. Acceptance or Rejections................................. 5
Section 13. Payment.................................................. 5
Section 14. Unit Repair.............................................. 6
PART III CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY................. 7
Section 15. Confidential Information................................. 7
Section 16. Intellectual Property.................................... 8
PART IV TERMS AND TERMINATION.............................................. 9
Section 17. Term of the Agreement.................................... 9
Section 18. Termination for CSI's Convenience........................ 9
Section 19. Cancellation for Default................................. 9
Section 20. Cancellation of Purchase Orders.......................... 10
Section 21. Excusable Delays......................................... 10
Section 22. Return of Materials and Right of Entry................... 11
PART V CONTRACT ADMINISTRATION............................................ 11
Section 23. Managing Coordinators.................................... 11
Section 24. Engineering Changes...................................... 11
</TABLE>
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART VI GENERAL........................................................... 12
Section 25. Order of Precedence..................................... 12
Section 26. Nonexclusive Agreement.................................. 12
Section 27. Amendments to the Agreement............................. 12
Section 29. Governing Law........................................... 12
Section 30. Liability............................................... 13
Section 31. Survival of Terms....................................... 13
Exhibit A - Telephone and Systems Pricing................................... 14
Exhibit B - Long Lead-Time Components....................................... 16
</TABLE>
ii.
<PAGE>
PART I. PARTIES TO THE AGREEMENT
SECTION 1. MANUFACTURING AGREEMENT
This Agreement dated August 1, 1998, is made by and between Cortelco
Systems, Inc. (hereafter referred to as "CSI") and CMC Manufacturing, Inc.
(hereafter referred to as "CMC").
PART II. PERFORMANCE
SECTION 2. ORDERS AND DELIVERY
2.1. FORECASTS. The actual authorization to perform work under this
Agreement will be given by CSI in the form of a combined "Firm Delivery and
Forecast" schedule. This forecast shall have a two months firm delivery schedule
with confirming Purchase Order and shall have an additional (4) month forecast.
CSI will have financial responsibility for those long-lead components (lead time
of 75 days or greater) listed in Exhibit B. CSI's responsibility for these
components will be limited to the quantity required consistent with the quantity
of assemblies reflected on the forecast and the individual component's stated
lead time. CSI shall not be liable for any other costs incurred by CMC in its
anticipation of product quantities in excess of the quantities set forth in the
Purchase Orders or the forecast. CSI is not responsible for any work performed
in excess of that authorized by CSI in such Purchase Orders. Furthermore, CMC
shall fulfill such requests only when a valid CSI purchase order number has been
issued by CSI.
2.2. PURCHASE ORDER(S). CSI will issue Purchase Orders with
applicable part numbers to CMC for products required in the Firm Delivery
Schedule. The Purchase Order is the authorization by CSI to offer materials,
allocate labor or equipment, or enter into any other commitments for the
assembly of the Product(s).
2.3. DELIVERY SCHEDULE. Delivery of Products hereunder shall be made
on a daily basis. The quantity of Products to be Delivered shall be determined
by the confirming Purchase Orders issued by CSI to CMC.
2.4. DELIVERY SCHEDULE CHANGES. CSI may increase or decrease the
Base Quantity for any month on Purchase Order ten percent (10%) of the Base
Quantity amount, at no additional cost to CSI, provided CSI provides notice of
such change no later than close of business of the last business day prior to
the affected month. However, the decreased quantity must be rescheduled for
delivery sometime within the forecasted time frame.
SECTION 3. DESCRIPTION OF WORK
3.1. Under this Agreement. CMC agrees to manufacture, sell and
deliver and CSI agrees to purchase Units according to the terms of this
Agreement.
3.2. The Units to be purchased under this Agreement are specifically
detailed and described in Engineering documentation (e.g. assembly stocklists
and authorized vendor lists) provided by CSI.
1.
<PAGE>
3.3. The Units sold to CSI under this Agreement shall be in
accordance with the CSI Purchase Order.
3.4. CMC shall order and receive component parts and subassemblies
of the Units only from CSI approved vendors.
3.5. CMC shall produce the Units in accordance with Section 6.
3.6. CMC shall conduct in-process inspections, final inspection and
perform 100% functional test of all Units prior to shipping to CSI.
3.7. CMC shall package the Units in accordance with the CSI
packaging specifications and drawings.
SECTION 4. PRICE
4.1. The price to be paid by CSI for telephone and system products
are as described in Exhibit A. This pricing will be negotiated annually. Cost
reductions initiated by either party will be implemented on a priority basis and
the price will be adjusted at the start of next fiscal quarter.
4.2. The unit price to be paid by CSI for the Units covered under
this Agreement includes all charges for the Units as specified on the CSI
Purchase Order. However, if there is a significant (greater than 5%) change in
the cost of purchased material due to unforeseen market conditions, CMC shall
provide to CSI quotes from their supplier which document the increase. CSI will
have (5) working days to approve the price change or to identify an alternate
supplier or substitute component.
4.3. All prices are expressed and all payments shall be made in U.S.
Dollar currency.
4.4. Cost reduction activities are an important part of this
Agreement. Both parties will initiate proposals for evaluation whereby
manufacturing cost can be reduced. Bi-monthly coordination meetings will be held
to identify and monitor the status of cost reduction initiatives. During the
first year of implementation, new cost reductions will be shared on a 50/50
basis. For the second and all subsequent years, 100% of the cost reduction
benefit will be provided to CSI. The annual cost savings target is to be from 3%
to 5% of the total annual purchase amount.
SECTION 5. ORDERING
5.1. CSI shall submit CSI Purchase Order(s) for Units to be
delivered within sixty (60) days. CSI shall issue such Purchase Orders(s) for
delivery of Units at least fifteen (15) days prior to the first delivery date.
The foregoing shall not prevent CSI from placing Purchase Orders for Units for
delivery in less than thirty (30) days and CMC shall make every reasonable
effort to deliver such Units on the requested schedule.
2.
<PAGE>
5.2. CSI will issue Purchase Order(s) and will transmit delivery
schedules to CMC. Upon receipt of a Purchase Order. CMC will acknowledge such
Purchase Order back to CSI.
5.3. CSI shall not be responsible for work performed, material
purchased or other commitments or expenses incurred by CMC other than as stated
in the Purchase Order provided by CSI, unless otherwise agreed to in writing by
both parties.
SECTION 6. MANUFACTURING
6.1. CMC shall provide all parts, labor, and material necessary to
perform CMC's obligations. Any adjustments to the price of the Unit necessitated
by a change to the specific parts, materials, or vendors resulting from an
Engineering Change Order or other notice in writing must be identified to CSI
and approved by CSI before the change is implemented. CMC agrees to manufacture
the Units according to CSI's drawing package and will not make any substitutions
without prior written consent from CSI.
6.2. CMC shall manufacture the Units to meet an outgoing quality
level set at a .65% AQL for major defects and 1.5% AQL for minor defects.
Printed circuit assemblies must conform to workmanship standard of IPC-610 Rev
B, Class II unless otherwise noted on documentation.
6.3. CSI may review CMC's performance of the work under this
Agreement including development, fabrication and tests of the Units, the design
of the tools used to produce them, and their operation.
6.4. To review the work, CSI may visit the sites where CMC performs
it. CSI shall visit the sites during normal business hours, with reasonable
notice to CMC.
6.5. No parts containing Polychlorinated Biphenyls (PCBs) or
chemicals using PCBs shall be used in the manufacturing of these Units for CSI
by CMC.
6.6. CMC shall notify CSI promptly of any errors found in drawings
and specifications required under this Agreement.
SECTION 7. TOOLING
7.1. CSI shall provide written authorization to CMC and CMC shall be
responsible for the design and order of new tooling which CSI requires. Tooling
is defined as dies, molds, in-circuit test fixtures, solder-screening stencils,
etc., which are unique in design or construction for a specific manufactured
item. Not included are standard factory equipment or hand tools which are
commonly used in the production of a variety of products.
7.2. CMC shall submit new tooling charges in accordance with CSI's
written authorization to CSI and all backup documentation associated with such
charges. Notwithstanding the foregoing, CSI may request additional information
regarding such charges in order to confirm the legitimacy of the charges. CMC
shall be paid for the production tooling. Ail tooling paid for by CSI shall be
the property of CSI.
3.
<PAGE>
7.3. CSI reserves the right to inspect the Tooling and all
documentation associated with such Tooling upon reasonable notice to CMC.
7.4. CMC agrees not to mortgage, sell, borrow against, lien or to
encumber any CSI owned tooling in any way.
7.5. Upon termination, cancellation or expiration of the Agreement,
CSI has the right to remove all CSI owned tooling from CMC's premises at CSI's
expense. CSI may also elect to have said tooling be destroyed by CMC in front of
a CSI witness and have the tooling disposed of at CSI's expense, if any.
SECTION 8. PACKAGING
8.1. Packaging shall conform to the CSI drawings and product
specifications. CMC shall be responsible for procurement of materials, any
testing required and obtaining CSI's approval of packaging.
8.2. All labeling and packing lists containing the purchase order
number, Unit part numbers and quantity shipped shall accompany each shipment.
SECTION 9. WARRANTIES.
9.1. CMC warrants that Units delivered to CSI by CMC hereunder shall
conform in every respect to all specifications which are a part of this
Agreement and to be free from defects in material and workmanship under normal
use and operation for a period of one hundred eighty (180) days from the date of
manufacture. Date of Manufacture is defined as one hundred eighty (180) days
prior to manufacturer's date stamp.
9.2. CMC shall, at CSI's option, either replace or repair Units
found to be defective during this warranty period with Units which conform to
the specifications which are part of this Agreement and in force at the time the
defective Units were originally delivered. In the case of replacement, CMC shall
deliver to CSI replacement Units within thirty (30) days from the date CMC
receives the defective Units from CSI.
9.3. CMC's warranty shall not apply to any defects caused by
improper use, handling, or transportation after delivery to CSI, unless
improperly packaged by CMC.
SECTION 10. DELIVERY
10.1. CMC shall deliver Units to CSI. It is the responsibility of CMC
to schedule production and delivery of all Units ordered under this Agreement to
the Sawyer Road location by the scheduled delivery date contained in the CSI
monthly deliver schedule and confirming Purchase Order.
SECTION 11. TITLE
11.1. The risk of loss and title to the Units shall pass to CSI upon
shipment.
SECTION 12. ACCEPTANCE OR REJECTIONS
4.
<PAGE>
12.1. CMC shall provide and maintain an inspection procedure and
quality assurance program for Units and their production processes. This
procedure shall permit CMC to meet the level of quality described in Section
6.2. Inspection records maintained by CMC, including gauge inspection and
equipment calibration, shall be made available to CSI at a reasonable time, upon
request.
12.2. CSI may inspect and test all Units prior to acceptance or
rejection, and may refuse to accept Units which do not conform to the
specifications in this Agreement. All Units shall be subject to preliminary and
final inspection by CSI. If, after thirty (30) working days from delivery of
Units, CSI has not notified CMC of rejection, the Units shall be deemed to be
accepted by CSI. The act of payment for Units shall not of itself signify CSI's
acceptance.
12.3. If CSI rejects any Units, CMC shall issue a Return
Material Authorization and repair, adjust, or replace the defective units which
fail to meet the specifications set forth in this Agreement.
SECTION 13. PAYMENT
13.1. CSI will not pay CMC for any Units or charges unless the Unit
is delivered and accepted and the charges are in accordance with an authorized
Purchase Order previously submitted to CMC by CSI.
13.2. CMC shall submit invoice(s) to CSI upon shipment of Units.
Invoice(s) shall be sent to:
Cortelco Systems, Inc.
4119 Willow Lake Boulevard
Memphis, TN 38118
Attention: Accounts Payable
13.3. Terms of payment shall be made net 45 days after shipment of
the product.
13.4. The following information is required to be clearly stated on
the invoice:
CSI Purchase Order Number
Part Number
Quantity
Terms of Payment
Unit Price
CMC Shipping Ticket Number
13.5. If CSI rejects the Units under Section 12, ACCEPTANCE OR
REJECTION, after paying for them, CMC shall honor CSI's request for refund of
payment.
13.6. The payments described in this Section 13, fully compensate CMC
for all work performed under this Agreement.
If there are any additional charges incurred by performing additional
work due to Engineering changes or other written notice that affects work-in-
process or requires modification
5.
<PAGE>
operations, these charges must be approved by CSI before they are incurred.
These charges will be invoiced separately.
SECTION 14. UNIT REPAIR
14.1. CSI shall return Units that are defective in accordance
to Section 9, WARRANTIES or that need repair in accordance to Section 14, UNIT
REPAIR, to:
CMC Manufacturing, Inc.
1801 Fulton Drive
Corinth, Mississippi 38834
Attn: Repair Department
14.2 CMC shall repair or replace the defective units which do not
meet the specification requirements, and return them to the address specified by
CSI.
14.3. CMC agrees to provide spare assemblies to CSI or an approved
repair center for a period of five years following the expiration or termination
of this Agreement or five (5) years following the formal "Product Abandonment"
of a product, whichever occurs earlier.
14.4. CMC shall not be responsible for the repair or replacement of a
Unit that has been improperly used and/or handled. Such Units shall be returned
to CSI as unrepairable. Units repaired under warranty shall appear and function
as if they were new. Repair of non-warranty and/or post-warranty Units shall be
in accordance with CSI instruction. Upon receipt of the returned Unit(s), CMC
shall repair and ship the Unit(s) to the location designated by CSI within
thirty (30) working days.
14.5. Units returned for defects in workmanship and/or materials
during the warranty period, as set forth in Section 9, will be repaired at no
charge to CSI. Units returned for defects are not the responsibility of CMC or
after the expiration of the warranty period, shall be paid for by CSI. Should
CMC elect to perform unauthorized repairs, CSI shall not be liable for any
resulting charges.
14.6. CMC agrees to record date codes and corrective action for all
Units returned for repair or replacement.
14.7. All Units returned to CMC for repairs must be brought up t the
latest Engineering Change (EC) level when repaired (excluding "manufacturing
only" changes), and the incremental cost to the latest EC level shall be borne
by CSI.
14.8. Upon expiration or in the event Cortelco terminates this
Agreement, CMC and CSI shall, at CSI's option, negotiate in good faith, terms
for CMC's continued repair of Units for five years from the date that the last
Unit was delivered to CSI.
PART III. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY
Section 15. CONFIDENTIAL INFORMATION
6.
<PAGE>
15.1. "CONFIDENTIAL INFORMATION" shall mean that information disclosed
to CMC by CSI in the course of the term of this contract which relates to CSI's
past, present, and future research, development, and business activities, and
which has been identified to CMC as being the Confidential Information of CSI.
15.2. The term "Confidential Information" shall not mean any
information which is:
(a) Already in the possession of CMC and not furnished by CSI
(b) Rightfully received from a third party without obligation
of confidence;
(c) Independently developed by CMC;
(d) Now, or hereafter becomes, publicly available without
breach of this Agreement; or
(e) Approved for release by written agreement of CSI.
15.3. When disclosed in writing, the information will be labeled as
"Cortelco Systems Confidential." When disclosed orally, such information will be
identified as "Cortelco System Confidential" at the time of disclosure, with
subsequent confirmation in writing referencing the date and type of information
disclosed. CMC agrees to clearly label as "Cortelco Systems Confidential" all
information reduced to writing by CMC as a result of such oral disclosures. CMC
also agrees to clearly label as "Cortelco System Confidential" all information
prepared or developed by CMC for CSI and reduced to writing by CMC which is
deliverable to CSI hereunder.
15.4. For a period of five (5) years from the date of disclosure, CMC
agrees to hold all such Confidential Information in trust and confidence for CSI
and not to use such Confidential Information other than for the benefit of CSI.
Except as may be authorized by CSI in writing, for such period of time, CMC
agrees not to disclose any such Confidential Information, by publication or
otherwise, to any person other than those persons whose services CMC requires
who have a need to know such Confidential Information for purposes of carrying
out the terms of this Agreement, and who agree in writing to be bound by, and
comply with the provisions of this Section.
15.5. CMC shall secure documents, items of work in process and work
products that embody "Cortelco Systems Confidential" Information, in locked
files or areas providing restricted access to prevent its unauthorized
disclosure.
15.6. CMC shall maintain adequate procedure to prevent loss of any
"Cortelco Systems Confidential" documents. In the event of any loss, CMC shall
notify CSI immediately.
15.7. CMC shall return to CSI all Confidential Information upon
request by CSI or upon termination or expiration of this Agreement.
7.
<PAGE>
15.8. CMC shall not subcontract any activity described herein as
"Cortelco Systems Confidential" Information without CSI's prior written
approval.
15.9. CSI does not wish to receive confidential information of CMC,
but in the event information disclosed by CMC to CSI is deemed confidential, CSI
will retain any such information in confidence.
SECTION 16. INTELLECTUAL PROPERTY
16.1. CMC will promptly advise CSI if it develops a reasonable basis
for believing that the delivered material and/or items may violate any
intellectual property rights of a third party.
16.2. CSI agrees to notify CMC promptly in writing of any such claim.
16.3. Manufacturing/Marketing Rights. CMC acknowledges that CSI owns
all rights to Millennium Systems and ISDN products. CSI has the right to market
said units anywhere in the world subject to the laws and regulations of any
country of impact.
16.4. Design Rights. It is acknowledged that features and
processes subsequently developed under CSI's direction and at CSI's expense are
the proprietary and confidential designs of CSI. Nothing in this Agreement shall
be construed as establishing, transferring, or otherwise conveying the rights,
interest or license in such features and processes, whether by implication,
estoppel or otherwise. It is acknowledged that the design of the Systems
products are the property of CSI and shall be held by CMC as confidential
information.
16.5. Rights in Data. All of the works and/or items prepared for or
submitted to CSI by CMC under this Agreement shall belong exclusively to CSI and
shall be prepared so as to be works made for hire according to Title 17 of the
United States Code and CMC hereby assigns to CSI the ownership of copyright in
the deliverable works and/or items and CSI shall have the right to obtain and
hold in its own name copyrights, registrations and similar protection which may
be available in the deliverable items. CMC agrees to give CSI or its designees
all assistance reasonably required to perfect such rights.
To the extent that any pre-existing materials are contained in the
deliverable items hereunder, CMC grants to CSI an irrevocable, non-exclusive,
world-wide, royalty-free license to: (1) use, execute, reproduce, display,
perform, distribute, (internally or externally) copies of, and prepare
derivative works based upon such pre-existing materials and derivative works
thereof, and (2) authorize others to do any, some, or all of the foregoing.
PART IV TERMS AND TERMINATION
SECTION 17. TERM OF THE AGREEMENT
17.1. The term of this Agreement shall commence on August 1, 1998 and
shall expire on July 31, 1999. CSI shall have the option to renew this Agreement
for additional periods of one year each. CSI shall provide CMC sixty (60) days
notice of its intention to exercise the extension option.
8.
<PAGE>
17.2. CSI may end this Agreement at any time without
obligation to CMC if CMC defaults in the performance hereof as described Section
20, "Cancellation For Default."
17.3. Either CSI or CMC may terminate this Agreement, without
any prior notice, in the event that the other party shall:
(a) Become insolvent or have a petition in bankruptcy,
reorganization or similar action filed by or against it;
(b) Have all or a substantial portion of its capital stock or
assets expropriated or attached by any government entity;
(c) Be dissolved or liquidated or have a petition for
dissolution or liquidation filed with respect to it; or
(d) Be subject to property attachment, court injunction, or
court order materially affecting its operations under this Agreement.
SECTION 18. TERMINATION FOR CSI'S CONVENIENCE
18.1. Either party may completely or partially terminate this
Agreement for just cause at any time, by giving ninety (90) days written notice
to the other party. The written notice shall describe the extent of termination
and its effective date.
18.2. On receiving the termination notice, CMC shall immediately stop
work to the extent acquired by the notice.
18.3. Under this Section 18, CSI shall pay CMC amounts due for Units
already completed, any unpaid tooling balance, work-in-process and components in
inventory and on order that cannot be cancelled without charge, if they were in
response to a CSI Purchase Order.
SECTION 19. CANCELLATION FOR DEFAULT
19.1. Either party's failure to perform any of its material
obligations under this Agreement shall be a default. If either party defaults,
the other party may cancel the Agreement by giving the defaulting party a
written notice of cancellation. The cancellation notice shall state the reason
for the cancellation and its effective date.
19.2. The canceling party shall have no obligation to the defaulting
party, once the Agreement is cancelled for default.
19.3. The non-defaulting party may agree to continue the Agreement
rather than canceling it. To do so, that party shall send a notice of default to
the defaulting party instead of a notice of cancellation, or to replace an
earlier notice of cancellation. The notice of default shall state the nature of
the default, and the conditions under which the non-defaulting part will agree
to continue the Agreement. By agreeing to continue the Agreement in this manner,
the non-defaulting party does not waive its right to later cancel the Agreement
for default based on the event of default that is the subject of the notice.
9.
<PAGE>
19.4. If CMC cancels this Agreement for default by CSI, CSI shall pay
CMC all payments for work completed, if they were in response to a Purchase
Order, on the effective date of cancellation.
19.5. If CSI cancels this Agreement for default by CMC, CSI shall pay
CMC for all work completed to the satisfaction of CSI. CMC shall deliver to CSI
all documents, information, and work in process produced in performance of this
Agreement. CMC shall also pay for any additional costs which CSI may incur in
having a third party complete the work in which CMC defaulted.
SECTION 20. CANCELLATION OF PURCHASE ORDERS
20.1. In the event of a cancellation of a Purchase Order under this
Section, CSI will pay CMC for the reasonable and allowable material cost
including importation tax, labor costs and overhead incurred prior to the
effective date of the cancellation, plus a reasonable profit (not to exceed 5%
on such materials and labor costs, and CMC will deliver to CSI all completed
Units, work-in-process, and all unique components procured on account of the
cancelled Purchase Order(s). CMC shall cease operation on subject Purchase
Orders in accordance with the cancellation notice and shall make every
reasonable effort to cancel commitments for resale of or divert materials and/or
work-in-process (with the exception of the case such resale or diversion
infringes CSI's rights under his Agreement).
In no event, however, will CSI's payment exceed the amount on the
Purchase Order for items and quantity affected.
20.2. Prior to CSI's payment, CSI may audit CMC's records at
reasonable times during normal business hours or require CMC to provide
reasonable documentation and invoices to substantiate any and all charges made
to CSI under this Section.
SECTION 21. EXCUSABLE DELAYS
21.1. Neither party shall be in default or liable to the other for
any failure to perform directly caused by events beyond that party's reasonable
control, such as acts of nature, war, insurrections, riots, acts of governments,
embargoes and unusually severe weather provided the effected party notifies the
other party within five days of the occurrence. Such an event is an Excusable
Delay. THE PARTY AFFECTED BY AN EXCUSABLE DELAY SHALL TAKE ALL REASONABLE STEPS
TO PERFORM DESPITE THE DELAY. If the party is unable to perform within a
reasonable period, this Agreement shall end without any further obligation of
the unaffected party.
SECTION 22. RETURN OF MATERIALS AND RIGHT OF ENTRY
22.1. Unless otherwise notified by CSI within one month of the date
of expiration, termination or cancellation of this Agreement, CMC shall return
to CSI all materials containing Cortelco Systems Confidential Information,
documents produced in the performance of this Agreement, work-in-process, parts,
tools and test equipment paid for, owned or supplied by CSI at CSI's expense.
10.
<PAGE>
22.2. Right of Entry. In the event of termination of this Agreement,
CSI shall have the right to enter CMC's premises and take possession of all CSI
owned tooling or property, to file a security interest in such tooling or
property or to invoke any other legal or equitable remedy available to protect
its interest in the tolling or property.
PART V. CONTRACT ADMINISTRATION
SECTION 23. MANAGING COORDINATORS
23.1. Each party shall appoint a managing coordinator who shall be
the sole authority to communicate between the parties.
23.2. The managing coordinator shall be responsible for the
following:
(a) Check progress of production.
(b) Submitting and approving requests for Engineering Changes.
(c) Scheduling visits and meetings.
(d) Transferring information, including Cortelco Systems
Confidential Information, and recording such transfers, and
(e) Giving and receiving notices required by this Agreement.
23.3. The managing coordinators do not have authority to agree to
changes to the terms of this Agreement.
SECTION 24. ENGINEERING CHANGES
24.1. Engineering Change shall mean any mechanical, electrical,
electro-mechanical or process change to any Units, including changes originating
with CSI or CMC, which change would affect the safety, performance, cost,
reliability, serviceability, appearance, dimensions, tolerances, materials and
composition of any bill of material of the Units.
24.2. Either party may request an Engineering Change, such as a
change to the Specifications. The managing coordinator of the requesting party
shall give a written request for the Engineering Change to the managing
coordinator for the other party.
24.3. If CSI requests an Engineering Change, within thirty (30) days
of receiving the request, CMC shall report to CSI in writing, the likely effects
of the change on the Unit's performance, reliability and safety, and on
schedules and prices. If CMC requests an Engineering Change, it shall submit the
written report with the request.
24.4. CSI shall decide whether to implement an Engineering Change
within thirty (30) days of receiving the written report from CMC. CMC shall not
implement an Engineering Change without CSI's written approval. If the
Engineering Change requires a change in prices or schedules, CMC shall not
implement the Engineering Change until both parties have agreed to revised
pricing.
11.
<PAGE>
PART VI. GENERAL
SECTION 25. ORDER OF PRECEDENCE
25.1. In the event of any inconsistency in the provisions of
the following, the order of precedence shall be as follows:
(a) This agreement without its Exhibits.
(b) Exhibits to this Agreement.
(c) Provisions specified on the face of CSI's Purchase Orders.
(d) Provisions specified on the face of CMC's invoices.
(e) Provisions specified on the reverse side of CMC's
invoices.
SECTION 26. NONEXCLUSIVE AGREEMENT
26.1. This Agreement does not preclude either party from entering
similar agreements with others, or from developing, manufacturing, buying or
selling any product or service.
SECTION 27. AMENDMENTS TO THE AGREEMENT
27.1. This Agreement may only be changed or supplemented by a written
amendment, signed by authorized representatives of each party.
SECTION 28. ASSIGNMENT OR DELEGATION PROHIBITED
28.1. Neither party may assign its rights or delegate its obligations
under this Agreement without the prior written approval of the other party. Any
attempted assignment or delegation without such an approval shall be void.
SECTION 29. GOVERNING LAW
29.1. This Agreement shall be governed by the laws of the State of
Tennessee.
SECTION 30. LIABILITY
30.1. In the event that CMC causes damages to CSI by breach of this
Agreement or torts including product liability, CMC shall compensate CSI for all
such damages including attorney's fees incurred by CSI.
SECTION 31. SURVIVAL OF TERMS
31.1. All obligations and duties that by thus nature survive the
expiration, cancellation, or termination of the Agreement shall remain in effect
after expiration, cancellation or termination, including Section 9 (Warranties),
14 (Unit Repair Section), 15 (Confidential
12.
<PAGE>
Information), 16 (Intellectual Property), and shall bind the parties and their
legal representatives, successors and assigns.
CORTELCO SYSTEMS, INC.
By: /s/ J. Michael O'Dell
-----------------------------
Title: President & CEO
--------------------------
Date: 8/12/98
---------------------------
CMC MANUFACTURING, INC.
By: /s/ Al Luffoon
-----------------------------
Title: Sr. VP Program Mgm't
--------------------------
Date: 8/20/98
---------------------------
13.
<PAGE>
EXHIBIT A -- TELEPHONE AND SYSTEMS PRICING
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PART NUMBER DESCRIPTION COST VOLUME DISCOUNT PRICING
----------- ----------- ---- -----------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
188990-0CL-PAK LCD DISPLAY ASSY 2X24 $ 19.78
- ---------------------------------------------------------------------------------------------------------------------------------
189127-102-PAK 200 W POWER SUPPLY BOOSTER $ 181.64
- ---------------------------------------------------------------------------------------------------------------------------------
189170-101-PAK 128 PORT -- 8 SLOT SYSTEM $ 1,943.81
- ---------------------------------------------------------------------------------------------------------------------------------
189208-101-PAK 8 ANALOG STATION BABY BDS $ 168.43 $171.28/500 $168.43/1,000 $161.28/2,000
- ---------------------------------------------------------------------------------------------------------------------------------
189209-101-PAK 8 ICLID BABY BDS $ 104.99
- ---------------------------------------------------------------------------------------------------------------------------------
189610-102-PAK 256 PORT -- 16 SLOT SYSTEM $ 2,596.62
- ---------------------------------------------------------------------------------------------------------------------------------
189615-101-PAK 256 PORT -- 16 SLOT SYSTEM TBD
- ---------------------------------------------------------------------------------------------------------------------------------
189648-0CL-PAK 4X40 LCD DISPLAY $ 48.62
- ---------------------------------------------------------------------------------------------------------------------------------
189865-101-PAK 4-SLOT SHELF ASSY $ 363.77 $515.60/25 $431.89/50 $363.77/100 $331.07/200
- ---------------------------------------------------------------------------------------------------------------------------------
500002-536-002 DIGITAL LINE CARD $ 267.29
- ---------------------------------------------------------------------------------------------------------------------------------
500004-536-002 SYSTEM CONTROLLER PCB $ 414.21
- ---------------------------------------------------------------------------------------------------------------------------------
500005-017-001 BASE SUPPORT KIT $ 31.63
- ---------------------------------------------------------------------------------------------------------------------------------
500012-536-002 ANALOG LINE CARD PCB TBD
- ---------------------------------------------------------------------------------------------------------------------------------
500013-000-101 3100 INTERFACE CARD $ 397.17
- ---------------------------------------------------------------------------------------------------------------------------------
500025-000-101 T-1 MASTER CLOCK $ 249.22
- ---------------------------------------------------------------------------------------------------------------------------------
500025-000-102 E-1 CLOCK CARD OPTION $ 249.22
- ---------------------------------------------------------------------------------------------------------------------------------
500026-000-101 SLAVE CONCENTRATOR $ 255.16
- ---------------------------------------------------------------------------------------------------------------------------------
500027-000-101 MASTER CONCENTRATOR $ 399.21
- ---------------------------------------------------------------------------------------------------------------------------------
500035-536-002 ICLID BABY BOARD $ 13.60
- ---------------------------------------------------------------------------------------------------------------------------------
500040-000-101 INTEGRATED NT1 $ 92.53
- ---------------------------------------------------------------------------------------------------------------------------------
500045-000-101 COMMON SERVICES II $ 318.95
- ---------------------------------------------------------------------------------------------------------------------------------
500054-000-102 200 W POWER SUPPLY W/RIN $ 638.65
- ----------------------------------------------------------------------------------------------------------------------------------
500054-000-103 400 W POWER SUPPLY W/RIN $ 805.26
- ----------------------------------------------------------------------------------------------------------------------------------
500054-000-205 200 W 36-76 POWER SUPPLY $ 523.27
- ----------------------------------------------------------------------------------------------------------------------------------
500055-000-101 RING GENERATOR PIGGY-BACK $ 44.50
- ----------------------------------------------------------------------------------------------------------------------------------
500057-000-101 8 SLOT CABINET $ 347.04
- ----------------------------------------------------------------------------------------------------------------------------------
500057-000-202 128 PORT CABINET -- 8 SLOT $ 336.04
- ----------------------------------------------------------------------------------------------------------------------------------
500058-000-101 DUAL SHELF BUS. BOARD $ 53.95
- ----------------------------------------------------------------------------------------------------------------------------------
500059-000-101 JUMPER B. PLANE $ 54.93
- ----------------------------------------------------------------------------------------------------------------------------------
500060-000-101 256 PORT CABINET/16 SLOT $ 874.28
- ----------------------------------------------------------------------------------------------------------------------------------
500063-000-101 METERING TK (8 PACK) $ 314.05
- ----------------------------------------------------------------------------------------------------------------------------------
500066-000-101 TONE DETECT (8 PACK) $ 205.26
- ----------------------------------------------------------------------------------------------------------------------------------
500081-000-101 FIBER INTERFACE CARD $ 417.78
- ----------------------------------------------------------------------------------------------------------------------------------
500082-000-101 REMOTE FIBER INTERFACE C $ 322.94
- ----------------------------------------------------------------------------------------------------------------------------------
500084-000-101 T-1 CARD GEN II $ 449.80
- ----------------------------------------------------------------------------------------------------------------------------------
500084-000-102 E-1 CARD GEN II $ 449.80
- ----------------------------------------------------------------------------------------------------------------------------------
500084-000-103 E-1 CARD (75 OHM) $ 551.56
- ----------------------------------------------------------------------------------------------------------------------------------
5000CL-751-101 LCD DISPLAY 2X24 TBD
- ----------------------------------------------------------------------------------------------------------------------------------
5001CL-751-101 LCD DISPLAY 4X40 TBD
- ----------------------------------------------------------------------------------------------------------------------------------
500200-000-101 MOTHERBOARD-CAGE ASSY $ 91.59 @25
- ----------------------------------------------------------------------------------------------------------------------------------
500200-800-102 32 PORT SYSTEM (MILLENNIUM) $ 909.59
- ----------------------------------------------------------------------------------------------------------------------------------
500200-800-103 48 PORT SYSTEM (MILLENNIUM) $ 1,049.45
- ----------------------------------------------------------------------------------------------------------------------------------
500200-800-104 64 PORT SYSTEM (MILLENNIUM) $ 1,128.02
- ----------------------------------------------------------------------------------------------------------------------------------
500201-000-101 MAIN CNTIR PCB ASSY $ 354.75 @25
- ----------------------------------------------------------------------------------------------------------------------------------
500203-000-101 S-LOOP PCB ASSY $ 63.96 @100
- ----------------------------------------------------------------------------------------------------------------------------------
500204-000-101 TRUNK PCB ASSY $ 138.23 @100
- ----------------------------------------------------------------------------------------------------------------------------------
500205-000-101 STATION PCB ASSY $ 110.41 @100
- ----------------------------------------------------------------------------------------------------------------------------------
500206-000-101 RS-232 $ 35.86 @100
- ----------------------------------------------------------------------------------------------------------------------------------
500206-704-101 EXP. CABINET (1 CARD CAGE) $ 190.60
- ----------------------------------------------------------------------------------------------------------------------------------
500207-000-101 PAGING $ 21.92 @100
- ----------------------------------------------------------------------------------------------------------------------------------
500209-000-101 DTMF REGISTER PCB ASSY $ 38.59 @100
- ----------------------------------------------------------------------------------------------------------------------------------
500210-000-101 RING GENERATOR $ 32.05 @50
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PART NUMBER DESCRIPTION COST VOLUME DISCOUNT PRICING
----------- ----------- ---- -----------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
500211-000-101 POWER SUPPLY, 110V $ 101.27 @50
- ----------------------------------------------------------------------------------------------------------------------------------
500215-000-101 TERMINATOR BOARD $ 24.82 @50
- ----------------------------------------------------------------------------------------------------------------------------------
500219-000-111 POWER SUPPLY, 110/220 $ 154.46 @50
- ----------------------------------------------------------------------------------------------------------------------------------
500300-760-101 EXTERNAL NT 1 $ 92.53
- ----------------------------------------------------------------------------------------------------------------------------------
5006CL-750-100 6 BUTTON TELEPHONE $ 78.85
- ----------------------------------------------------------------------------------------------------------------------------------
5012CL-750-100 12 BUTTON TELEPHONE $ 86.22
- ----------------------------------------------------------------------------------------------------------------------------------
5030CL-750-100 NEW 30 BTN MILL TEL $ 126.36
- ----------------------------------------------------------------------------------------------------------------------------------
9118CL-MOE-20E 18 BTN CORTELCO/M $ 105.09
- ----------------------------------------------------------------------------------------------------------------------------------
9130CL-MOE-20E 30 BTN CORTELCO/M $ 136.73
- ----------------------------------------------------------------------------------------------------------------------------------
9148CL-MOE-20E DSS/BLF CORTELCO $ 70.58
- ----------------------------------------------------------------------------------------------------------------------------------
CI1800-MOE-25U ISDN 18 BTN W/DISPLAY $ 144.34
- ----------------------------------------------------------------------------------------------------------------------------------
CI3000-MOE-25U ISDN 30 BTN W/DISPLAY $ 174.51
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15.
<PAGE>
EXHIBIT B -- LONG LEAD-TIME COMPONENTS
<TABLE>
<CAPTION>
PART NUMBER DESCRIPTION LEAD-TIME
<S> <C> <C>
500132415801 IC 150
500000422603 IC 150
500151415031 IC 150
500145415801 IC 150
500086415601 RING DETECTOR 150
500027415801 IC 150
500140415661 IC 150
500014415001 IC 150
500025415601 IC 150
500034415801 IC 150
500011373001 IC 150
500157415601 IC 150
500068415801 IC 150
500013415811 IC 150
500126415801 IC 150
183822101COM OPTO ISOLATOR 150
500005373002 IC 150
500046415801 IC 150
500002373601 OPTO COUPLER 150
500112415001 IC 150
500067415801 IC 150
500097415082 IC 150
500102415001 IC 150
500079415601 IC 150
600192410001 DOD SUPPRESSOR 120
600061411014 DOD SUPPRESSOR 120
600061411105 DOD SUPPRESSOR 120
500003396001 SURGE SUPPRESSOR 120
500027416001 DOD MUR1620CT 120
500003396002 SIDACTOR 120
500016416001 BRIDGE RECT 120
500003396201 TRANSIENT SUPPRESS 120
600102416001 DOD SUPPRESSOR 120
600197410003 DOD 120
500009416108 DIODE 120
600033416004 DIODE 120
500025416027 DOD 120
600033411061 DIODE 120
500019416001 XSTR 120
500007416001 DIODE 120
600033411048 DIODE 120
500005413001 XSTR 120
183611180COM CRYSTAL 120
</TABLE>
16.
<PAGE>
<TABLE>
<CAPTION>
PART NUMBER DESCRIPTION LEAD-TIME
<S> <C> <C>
183611155COM CRYSTAL 120
183611170COM CRYSTAL 120
500017413001 XSTR 120
500020413001 XSTR 120
500003410001 DIODE 120
500026416001 IC 120
600033411011 DIODE 120
600033411040 DIODE 120
500025416026 DOD 120
600028411001 DIODE 120
500002411112 DIODE 120
500002411024 DIODE 120
600197410001 DOD 120
500024416004 DIODE 120
500002411106 DIODE 120
500009416104 DIODE 120
500004373001 IC 110
500050415001 IC 90
500009416119 DIODE 90
600033411028 DIODE 90
500002390001 DIODE 90
185326201COM XSTR 90
500003605001 CONNECTOR 80
</TABLE>
17.
<PAGE>
Exhibit 10.9
ADDENDUM NO. 4 TO LEASE AGREEMENT NO. 2267 DATED 7/24/89 BY AND BETWEEN WILLOW
- ------------------------------------------------------------------------------
LAKE ASSOCIATES AND CORTELCO SYSTEMS, INC., A SUBSIDIARY OF CORTELCO SYSTEMS
- ----------------------------------------------------------------------------
HOLDING CORP.
- -------------
WHEREAS, COTERLCO USA, INC., A SUBSIDIARY OF INTERNATIONAL TELECOMMUNICATION
CORP., ("Original Tenant") and CMSMI - WILLOW 810, LIMITED PARTNERSHIP
("Original Landlord") have entered into Lease Agreement No. 2267 dated 7/24/89,
Addendum No. 1 dated 10/3/89, Addendum No. 2 dated 2/6/91 and Addendum No. 3
dated 10/10/94 (collectively the "Lease") covering 21,952 total square feet of
space located at 4117-4119 Willow Lake Boulevard, Willow Lake Business Park,
Building NO. 8, Memphis Tennessee 38118 ("Premises"), and
WHEREAS, Original Tenant has assigned its interest in the Lease to Cortelco
Systems, Inc., a subsidiary of Cortelco Systems Holding Corp. ("Tenant"), and
Original Landlord previously assigned its interest in the Lease to Willow Lake
Associates, a Florida General Partnership ("Landlord"), and
WHEREAS, Tenant has been on a month-to-month basis since October 12, 1997 and
Tenant and Landlord wish to amend this Lease for the purpose of extending the
Lease term for a period of twenty (20) months and making such other amendments
as set forth herein.
NOW, THEREFORE, for and in consideration of the Premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree that the Lease is amended as
follows:
1. Paragraph 1. Term. The term of the Lease shall hereby be extended for a
-----------------
period of twenty (20) months commencing October 1, 1997 and expiring on May 31,
1999.
2. Paragraph 2. Base Rent. Commencing October 1, 1997, the monthly rental
----------------------
shall be at a rate of FIFTEEN THOUSAND NINETY TWO AND 00/100 DOLLARS
($15,092.00) PER MONTH.
3. Tenant Improvements. The space shall be provided in an "AS-IS condition and
-------------------
Landlord will provide no improvements to the Premises.
4. Paragraph 6. Tenant's Repairs. In accordance with Paragraph 6 of the
------------------------------
Lease, commencing October 1, 1997, Tenant shall be responsible for its
proportionate share of common area maintenance charges currently estimated at
Seven Hundred Twelve Dollars ($712) per month.
5. It is hereby agreed that Item 6. Renewal Option and Item 7. Expansion Option
as per Addendum No. 3 are hereby deleted in their entirety.
ALL PROVISIONS OF THE LEASE not herein specifically modified and amended shall
remain in full force and effect and are hereby reaffirmed by the parties.
1.
<PAGE>
WITNESSED OUR HANDS this _____ day of April, 1998.
AGREED TO:
LANDLORD
WILLOW LAKE ASSOCIATES, a Florida general partnership
By: Amberwood, Inc., a Florida corporation
By: /s/ Jack Azout
---------------------------------------
Jack Azout, President
By: Stillwood Inc., a Florida corporation
By: /s/ Isaac Sredni
---------------------------------------
Isaac Sredni, President
WITNESS AS TO LANDLORD:________________________
TENANT
CORTELCO SYSTEMS INC., A SUBSIDIARY OF CORTELCO SYSTEMS HOLDING CORP.
By: /s/ J. Michael O'Dell Date: 4/6/98
---------------------------- -------
Title: President
-------------------------
WITNESS AS TO TENANT: /s/ Stephen N. Samp
---------------------
2.
<PAGE>
ADDENDUM NO. 3 TO LEASE AGREEMENT NO. 2267, DATED 7/24/89 BY AND BETWEEN WILLOW
- -------------------------------------------------------------------------------
LAKE ASSOCIATES AND CORTELCO USA, INC., A SUBSIDIARY OF INTERNATIOANL
- ---------------------------------------------------------------------
TELECOMMUNICATION CORP.
- -----------------------
WHEREAS, CORTELCO USA, INC., A SUBSIDIARY OF INTERNATIONAL TELECOMMUNICAITON
CORP., ("Tenant") and WILLOW LAKE ASSOCIATES, a Florida General Partnership
(successor in interest to CMSMI-Willow 810, Limited Partnership), ("Landlord")
have entered into Lease Agreement No. 2267 dated 7/24/89, Addendum No. 1 dated
10/3/89 and Addendum No. 2 dated 2/6/91 ("Lease") covering 21,952 total square
feet of space located at 4117-4119 Willow Lake Boulevard, Willow Lake Business
Park, Building No. 8, Memphis, Tennessee 38118 ("Premises"), and
WHEREAS, Tenant and Landlord wish to amend this Lease for the purpose of
extending the Lease term for a period of thirty-six (36) months and making such
other amendments as set forth herein.
NOW THEREFORE, for and in consideration of the Premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree that the Lease is amended as
follows:
1. Paragraph 1 - Term. The term of the Lease shall hereby be extended for a
------------------
period of thirty-six (36) months commencing October 1, 1994 and expiring on
September 30, 1997.
2. Paragraph 2 - Base Rent. Commencing October 1, 1994, the monthly rental
-----------------------
shall be at a rate of Thirteen Thousand Thirty-Four and 22/100 Dollars
($13,034.22) per month.
3. Tenant Improvements. Landlord will provide no improvements to the Premises
-------------------
for the period October 1, 1994 through September 30, 1997.
4. Landlord's Consent. Anywhere in this Lease that Landlord's prior written
------------------
consent is required, it is agreed that said consent shall not be
unreasonably withheld or denied.
5. Paragraph 17 - Events of Default. Paragraph 17 shall be amended to read,
--------------------------------
"and such failure shall continue for a period of five (5) days from the date
of notification by Landlord."
6. Renewal Option. Landlord grants Tenant the right to renew this Lease for
--------------
one (1) further term of five (5) years duration under rates and terms to be
negotiated in good faith by Tenant and Landlord based upon the prevailing
market rental rates for properties of equivalent quality, size, utility and
location at that time provided: (i) that Tenant shall have performed all of
the covenants of this Lease; (ii) that Tenant shall have notified Landlord
in writing not less than ninety (90) days prior to the expiration of the
original term of this Lease that Tenant elects to renew; and (iii) that
prior to the expiration of the original term, Tenant shall have signed a new
lease agreement on the form then employed by the Landlord for its Memphis
properties.
3.
<PAGE>
7. Expansion Option. While this Lease is in full force and effect, Landlord
----------------
shall grant to Tenant an ongoing right-of-first refusal throughout the term
of this Lease for any unleased space contiguous to their current space. Said
right-of-first refusal shall be predicated upon there being no incurred
default by the Tenant. In the event Tenant elects to exercise said right-of-
first refusal, Tenant shall give written notice of its election to Landlord
within five (5) days from receipt of written notification by Landlord. The
rent for the premises leased under and by virtue shall commence upon
occupancy of the premises or within thirty (30) days of tenant's election to
take space or whichever occurs first. The Lease for the said premises shall
be on the same terms and conditions as prevailed elsewhere in this Lease,
except that the rent shall be at a market rate. In the event Tenant elects
not to exercise this right-of-refusal when so notified by the Landlord, then
this right-of-first refusal shall be void for the balance of the lease term.
ALL PROVISIONS OF THE LEASE not herein specifically modified and amended shall
remain in full force and effect and are hereby reaffirmed by the parties.
WITNESSED OUR HANDS this 10/th/ day of October, 1994.
AGREED TO:
LANDLORD
WILLOW LAKE ASSOCIATES, a Florida general partnership
By: Amberwood, Inc., a Florida corporation
By: /s/ Jack Azout
------------------------------
Jack Azout, President
By: Stillwood Inc., a Florida corporation
By: /s/ Isaac Sredni
------------------------------
Isaac Sredni, President
WITNESS AS TO LANDLORD: /s/ Sharon A. O. Reilly
---------------------------
TENANT
4.
<PAGE>
CORTELCO SYSTEMS INC., A SUBSIDIARY OF
CORTELCO SYSTEMS HOLDING CORP.
By: /s/ Date: 9/22/94
------------------------ -----------
Title: President
---------------------
WITNESS AS TO TENANT /s/
------------------
5.
<PAGE>
ADDENDUM NO. 2 TO LEASE AGREEMENT NO. 2267 DATED 07/24/89 BY AND BETWEEN CMSMI-
- ------------------------------------------------------------------------------
WILLOW 810, LIMITED PARTNERSHIP AND CORTELCO USA, INC., A SUBSIDIARY OF
- -----------------------------------------------------------------------
INTERNATIONAL TELECOMMUNICATION CORP.
- -------------------------------------
This Lease Agreement shall be modified as follows:
Item No. 1 Base Rent and Security Deposit: Effective August 1, 1991, base rent
- -----------------------------------------
shall increase from $9,158.56 per month to $12,413.54 per month.
Item No. 2 Premises: Description of the premises shall change from reading
- -------------------
15,159 square feet to read 21,952 square feet located at 4117 - 4119 Willow Lake
Blvd., Bldg. 8.
Item No. 2 Beneficial Occupancy: As additional consideration for tenant to
- -------------------------------
expand by 6,793 square feet, Landlord commits to provide Tenant a minimum of
three (3) months free rent from the beginning of occupancy for the new expanded
premises.
Item No. 4 Tenant Improvements: As consideration for the Landlord to enter into
- ------------------------------
this Agreement, Tenant understands that Tenant will be responsible for paying
for all necessary Tenant improvements for the new expansion. In addition,
immediately following occupancy of the new expansion space by Cortelco, Landlord
will cancel and make null and void Lease Agreement. No. 2316, dated February 16,
1990, by and between Cortelco USA, Inc. and CMSMI-Willow 810, Limited
Partnership.
All other terms and conditions of the original Lease Agreement shall remain in
full force and effect and unaltered by this Addendum No. 2.
Effective date of this Addendum No. 2 shall be February 6, 1991.
AGREED:
CMSMI-WILLOW 810, LIMITED PARTNERSHIP
By: TCC Memphis Industrial Development II, Inc.
-------------------------------------------
Managing General Partner
By: /s/ Dudley Mitchell Title: President
------------------- ---------------------
Dudley Mitchell
CORTELCO USA, INC., A SUBSIDIARY OF
INTERNATIONAL TELECOMMUNICATION CORP.
-------------------------------------
By: /s/ Steve J. Fry Title: President
------------------ ----------------------
Steve J. Fry
6.
<PAGE>
ADDENDUM NO. 1 TO LEASE AGREEMENT NO. 2267 DATED 07/24/89 BY AND BETWEEN CMSMI-
- ------------------------------------------------------------------------------
WILLOW 810, LIMITED PARTNERSHIP AND CORINTH TELECOMUNICATIONS CORP., A
- ----------------------------------------------------------------------
SUBSIDIARY OF ALCATEL BUSINESS SYSTEMS, INC.
- --------------------------------------------
This Lease Agreement shall be modified as follows:
Item No. 1 Base Rent and Security Deposit: Base rent shall change form
- -----------------------------------------
$9,240.73 to $9,158.56 per month.
Item No. 2 Exhibit "A": Description of premises shall change from reading
- -------------------------
15,295 square feet to 15,159 square feet.
All other terms and conditions of the original Lease Agreement shall remain in
full force and effect and unaltered by this Addendum No. 1.
Effective date of this Addendum No. 1 shall be October 3, 1989.
AGREED:
CMSMI-WILLOW 810, LIMITED PARTNERSHIP
By: TCC Memphis Industrial Development II, Inc.
-------------------------------------------
Managing General Partner
By: /s/ Dudley Mitchell Title: President
---------------------------- ----------------------
CORINTH TELECOMMUNICATIONS CORP., A
SUBSIDIARY OF ALCATEL BUSINESS SYSTEMS, INC.
--------------------------------------------
By: /s/ Steve J. Fry Title: President
---------------------------- ---------------------
7.
<PAGE>
STANDARD COMMERCIAL LEASE AGREEMENT Willow Lake Business Park, #8
-----------------------------
(EXISTING BUILDING) 79 4119 Willow Lake Boulevard
--------------------------
Lease Agreement No. 2267
-------------------------
Date: 07/24/89
LEASE AGREEMENT
THIS LEASE AGREEMENT, made and entered into by and between CMSMI-WILLOW
------------
810, LIMITED PARTNERSHIP hereinafter referred to as "Landlord", and CORINTH
- ------------------------ -------
TELECOMMUNICATION CORP., A SUBSIDIARY OF ALCALTEL BUSINESS SYSTEMS, INC.
- ------------------------------------------------------------------------
hereinafter referred to as "Tenant";
1. Premises and Term. In consideration of the obligation of Tenant to
pay rent as herein provided, and in consideration of the other terms, provisions
and covenants here, Landlord hereby demises and leases to Tenant, and Tenant
hereby accepts and leases from landlord certain premises situated within the
County of Shelby, State of Tennessee, more particularly described on Exhibit "A"
------ ---------
attached hereto and incorporated herein by reference, together with all rights,
privileges, easements, appurtenances and immunities belonging to or in any way
pertaining to the premises and together with the buildings and other
improvements situated upon said premises (said real property, buildings and
improvements hereinafter referred to as the "premises").
TO HAVE AND TO HOLD the same for a term commencing on October 1, 1989 and
---------------
ending September 30, (60) months thereafter. Tenant acknowledges that it has
------------
inspected and accepts the premises, and specifically the buildings and
improvements comprising the same, in their present condition as suitable for the
purpose for which the premises are leased. Taking of possession by Tenant shall
be deemed conclusively to establish that said buildings and other improvements
are in good and satisfactory condition as of when possession was taken. Tenant
further acknowledges that no representations as to the repair of the premises,
nor promises to alter, remodel or improve the vacant or otherwise available and
ready for occupancy, or if any present tenant or occupant of the premises holds
over, and Landlord cannot acquire possession of the premises prior to the date
above recited as the commencement date of this lease, landlord shall not be
deemed to be in default hereunder, and Tenant agrees to accept possession of the
premises at such time as Landlord is able to tender the same, which date shall
thenceforth be deemed the "commencement date": and Landlord hereby waives
payment of rent covering any period prior to the tendering of possession to
Tenant hereunder. After the commencement date Tenant shall, upon demand,
execute and deliver to Landlord a letter of acceptance of delivery of the
premises.
2. Base Rent and Security Deposit.
A. Tenant agrees to pay to Landlord rent for the premises, in advance,
without demand, deduction or set off, for the entire term hereof at the rate of
Nine Thousand Two Hundred Forty & 73/100 ---------Dollars ($9,240.73----) per
- --------------------------------------------------
month. One such monthly installment shall be due and payable on the date hereof
and a like monthly installment shall be due and payable on or before the first
day of each calendar month succeeding the commencement date recited above during
the hereby demised term, except that the rental payment for any fractional
calendar month at the commencement or end of the lease period shall be prorated.
3. Use. The demised premises shall be used only for the purpose of A.)
receiving, storing, shipping and selling (other than retail) products, materials
and merchandise made and/or distributed by Tenant and for such other lawful
purposes as may be incidental thereto. Outside storage, including without
limitation, trucks and other vehicles, is prohibited without Landlord's prior
written consent. Tenant shall at its own cost and expense obtain any and all
licenses and permits necessary for any such use. Tenant shall comply with all
governmental laws, ordinances and regulations applicable to the use of the
premises, and shall promptly comply with all governmental orders and directives
for the correction, prevention and abatement of nuisances in or upon, or
connected with, the premises, all at Tenant's sole expense. Tenant shall not
permit any objectionable or unpleasant odors, smoke, dust, gas, noise or
vibrations to emanate from the premises, nor take any other action which would
constitute a nuisance or would disturb or endanger any other tenants of the
building in which the premises are situated or unreasonably interfere with their
use of their respective
8.
<PAGE>
premises. Without Landlord's prior written consent, Tenant shall not receive,
store or otherwise handle any product, material or merchandise which is
explosive or highly inflammable. Tenant will not permit the premises to be used
for any purpose or in any manner (including without limitation any method of
storage) which would render the insurance thereon void or the insurance risk
more hazardous or cause the State Board of Insurance or other insurance
authority to disallow any sprinkler credits.
4. Taxes
A. Landlord agrees to pay before they become delinquent all taxes,
assessments and governmental charges of any kind and nature whatsoever
(hereinafter collectively referred to as "taxes") lawfully levied or assessed
against the building and the grounds, parking areas, driveways and alleys around
the building; provided, however, that the maximum amount of taxes to be paid by
Landlord hereunder during any one real estate tax year shall be ------------1990
----------------
Tax Base Year-----------. If in any real estate tax year during the term hereof
- -------------------------
or any renewal or extension the taxes levied or assessed against the building
and the grounds, parking areas, driveways and alleys around the building during
such tax year shall exceed the sum set forth in the preceding sentence. Tenant
shall pay to Landlord as additional rental, upon demand, the amount of such
excess. In the event any such amount is not paid within twenty (20) days after
the date of landlord's invoice to Tenant, the unpaid amount shall bear interest
at the rate of ten percent (10%) per annum from the date of such invoice until
payment by Tenant.
B. In the event the premises constitute a portion of a multiple occupancy
building, Tenant agrees to pay Landlord, as additional rental, upon demand, the
amount of Tenant's "proportionate share" of the excess taxes referred to in
Paragraph A above. Tenant's "proportionate share", as used in this lease, shall
mean a fraction, the numerator of which is the space contained in the premises
and the denominator of which is the entire space contained in the building.
C. If at any time during the term of this lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments or governmental charges levied, assessed or imposed on real estate
and the improvements thereon, there shall be levy or charge measured by or
based, in whole or in part, upon such rents for the present or any future
building or buildings on the premises, then all such taxes, assessments, levies
or charges, or the part thereof so measured or based, shall be deemed to be
included within the term of "taxes" for the purposes hereof.
D. The Landlord shall have the right to employ a tax consulting firm to
attempt to assure a fair tax burden on the building and ground within the
applicable taxing jurisdiction. Tenant shall pay to Landlord upon demand from
time to time, as additional rent, the amount of Tenant's "proportionate share"
(as defined in subparagraph 4(B) above) of the cost of such service.
E. Any payment to be made pursuant to this Paragraph 4 with respect to
the real estate tax year in which this lease commences or terminates shall be
prorated.
5. Landlord's Repairs. Landlord shall at his expense maintain only the
roof, foundation and the structural soundness of the exterior walls of the
building in good repair, reasonable wear and tear excepted. Tenant shall repair
and pay for any damage caused by the negligence of Tenant, or Tenant's
employees, agents or invitees, or caused by Tenant's default hereunder. The
term "walls" as used herein shall not include windows, glass or plate glass,
doors, special store fronts or office entrys. Tenant shall immediately give
Landlord written notice of defect or need for repairs, after which Landlord
shall have reasonable opportunity to repair same or cure such defect.
Landlord's liability with respect to any defects, repairs or maintenance for
which Landlord is responsible under any of the provisions of this lease shall be
limited to the cost of such repairs or maintenance or the curing of such defect.
6. Tenant's Repairs.
A. Tenant shall at its own cost and expense keep and maintain all parts
of the premises (except those for which Landlord is expressly responsible under
the terms of this lease) in good condition, promptly making all necessary
repairs and replacements, including but not limited to, windows, glass and plate
glass, doors, any special office entry, interior walls and finish work, floors
and floor covering, downspouts, gutters, heating and air conditioning systems,
dock boards, truck doors, dock bumpers, paving, plumbing work and fixtures,
termite and pest extermination, regular removal of trash and debris, regular
mowing of any grass, trimming, weed removal and general landscape maintenance,
including rail spur areas, keeping the parking areas, driveways, alleys and the
whole of the premises in a clean and sanitary condition, and maintaining any
spur track serving the premises. Tenant shall not be obligated to repair any
damage caused by fire, tornado or other casualty covered by the insurance to be
maintained by Landlord pursuant to subparagraph 12(A) below, except that Tenant
shall be obligated to repair all wind damage to glass except with respect to
tornado or hurricane damage.
9.
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B. Tenant shall not damage any demising wall or disturb the integrity and
support provided by an demising wall and shall, at its sole cost and expense,
promptly repair any damage or injury to any demising wall caused by Tenant or
its employees, agents or invitees.
C. In the event the premises constitute a portion of a multiple occupancy
building, Tenant and its employees, customers and licensees shall have the
exclusive right to use the parking areas, if any, as may be designated by
Landlord in writing, subject to such reasonable rules and regulations as
Landlord may from time to time prescribe and subject to rights of ingress and
egress of other tenants. Landlord shall not be responsible for enforcing
Tenant's exclusive parking rights against any third parties. Further, in
multiple occupancy buildings, Landlord reserves the right to perform the paving
and landscape maintenance, exterior painting and common sewage line plumbing
which are otherwise Tenant's obligations under subparagraph A above, and Tenant
shall, in lieu of the obligations set forth under subparagraph A above with
respect to such items, be liable for its proportionate share (as defined in
subparagraph 4(B) above) of the cost and expense of the care for the grounds
around the building, including but not limited to, the mowing of grass, care of
shrubs, general landscaping, maintenance of parking areas, driveways and alleys,
exterior repainting and common sewage line plumbing; provided, however, that
Landlord shall have the right to require Tenant to pay such other reasonable
proportion of said mowing, shrub care and general landscaping costs as may be
determined by Landlord in its sole discretion; and further provided that if
Tenant or any other particular tenant of the building can be clearly identified
as being responsible for obstructions or stoppage of the common sanitary sewage
line, then Tenant, if Tenant is responsible, or such other responsible tenant,
shall pay the entire cost thereof, upon demand, as additional rent. Tenant
shall pay when due its share, determined as aforesaid, of such costs and
expenses along with the other tenants of the building to Landlord upon demand,
as additional rent, for the amount of its share as aforesaid of such costs and
expenses in the event Landlord elects to perform or cause to be performed such
work.
D. In the event the premises constitute a portion of a multiple occupancy
building, Landlord shall have the right to coordinate any repairs and other
maintenance of any rail tracks serving or to serve the building, and if Tenant
uses such rail tracks, Tenant shall reimburse Landlord from time to time upon
demand, as additional rent, for a share of the costs of such repairs and
maintenance and any other sums specified in any agreement to which Landlord is a
party respecting such tracks, such share to be a fraction, the numerator of
which is the space contained in the premises, and the denominator of which is
the entire space occupied by rail users in the building.
E. Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
for servicing all hot water, heating and air conditioning systems and equipment
within the premises. The maintenance contractor and the contract must be
approved by Landlord. The service contract must include all services suggested
by the equipment manufacturer within the operation/maintenance manual and must
become effective (and a copy thereof delivered to Landlord) with thirty (30)
days of the date Tenant takes possession of the premises.
7. Alterations. Tenant shall not make any alterations, additions or
improvements to the premises (including but not limited to roof and wall
penetrations) without the prior written consent of Landlord. Tenant may,
without the consent of Landlord, but at its own cost and expense and in a good
workmanlike manner erect such shelves, bins, machinery and trade fixtures as it
may deem advisable, without altering the basic character of the building or
improvements and without overloading or damaging such building or improvements,
and in each case complying with all applicable governmental laws, ordinances,
regulations and other requirements. All alterations, additions, improvements
and partitions erected by Tenant shall be and remain the property of Tenant
during the term of this lease and Tenant shall, remove all alterations,
additions, improvements and partitions erected by Tenant and restore the
premises to their original condition by the date of termination of this lease or
upon earlier vacating of the premises. All shelves, bins, machinery and trade
fixtures installed by Tenant may be removed by Tenant prior to the termination
of this lease if Tenant so elects, and shall be removed by the date of
termination of this lease or upon earlier vacating of the premises if required
by Landlord; upon any such removal Tenant shall restore the premises to their
original condition. All such removals and restoration shall be accomplished in a
good workmanlike manner so as not to damage the primary structure or structural
qualities of the buildings and other improvements situated on the premises.
8. Signs. Tenant shall have the right to install signs upon the premises
only when first approved in writing by Landlord and subject to any applicable
governmental laws, ordinances, regulations and other requirements. Tenant shall
remove all such signs by the termination of this lease. Such installations and
removals shall be made in such manner as to avoid injury or defacement of the
building and other improvements, and Tenant shall repair any injury or
defacement, including without limitation discoloration, caused by such
installation and/or removal.
9. Inspection. Landlord and Landlord's agents and representatives shall
have the right to enter and inspect the premises at any reasonable time during
business hours B.) for the purpose of ascertaining the condition of the premises
or in order to
10.
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make such repairs as may be required or permitted to be made by Landlord under
the terms of this lease. During the period that is six (6) months prior to the
end of the term hereof, Landlord and Landlord's agents and representatives shall
have the right to enter the premises at any reasonable time during business
hours for the purpose of showing the premises and shall have the right to erect
on the premises a suitable sign indicating the premises are available. Tenant
shall give written notice to Landlord at least thirty (30) days prior to
vacating the premises and shall arrange to meet with Landlord for a joint
inspection of the premises prior to vacating. In the event of Tenant's failure
to give such notice or arrange such joint inspection, Landlord's inspection at
or after Tenant's vacating the premises shall be conclusively deemed correct for
purposes of determining Tenant's responsibility for repairs and restoration.
10. Utilities. Landlord agrees to provide at its cost water, electricity
and telephone service connections into the premises; but Tenant shall pay for
all water, gas, heat, light, power, telephone, sewer, sprinkler charges and
other utilities and services used on or from the premises, together with any
taxes, penalties, surcharges or the like pertaining thereto and any maintenance
charges for utilities and shall furnish all electric light bulbs and tubes. If
any such services are not separately metered to Tenant, Tenant shall pay a
reasonable proportion as determined by Landlord of all charges jointly metered
with other premises. Landlord shall in no event be liable for any interruption
or failure of utility services on the premises. C.)
11. Assignment and Subletting. Tenant shall not have the right to assign
this lease or to sublet the whole or any part of the premises without the prior
written consent of Landlord. Notwithstanding any permitted assignment or
subletting, Tenant shall at all times remain directly, primarily and fully
responsible and liable for the payment of the rent herein specified and for
compliance with all of its other obligations under the terms, provisions and
covenants of this lease. Upon the occurrence of an "event of default" as
hereinafter defined, if the premises or any part thereof are then assigned or
sublet, Landlord, in addition to any other remedies herein provided, or provided
by law, may at its option collect directly from such assignee or subtenant all
rents becoming due to Tenant under such assignment or sublease and apply such
rent against any sums due to Landlord from Tenant hereunder, and no such
collection shall be construed to constitute a novation or a release of Tenant
from the further performance of Tenant's obligations hereunder.
12. Fire and Casualty Damage.
A. Landlord agrees to maintain standard fire and extended coverage
insurance covering the building of which the premises are a part in an amount
not less than 80% (or such greater percentage as may be necessary to comply with
the provisions of any co-insurance clauses of the policy) of the "replacement
cost" thereof as such term is defined in the Replacement Cost Endorsement to be
attached thereto, insuring against the perils of Fire, Lightning and Extended
Coverage, such coverages and endorsements to be as defined, provided and limited
in the standard bureau forms prescribed by the insurance regulatory authority
for the State in which the premises are situated for use by insurance companies
admitted in such state for the writing of such insurance on risks located within
such state. Subject to the provisions of subparagraphs 12(C), 12(D) and 12(E)
below, such insurance shall be for the sole benefit of Landlord and under its
sole control. If during the second full lease year after the commencement date
of this lease, or during any subsequent year of the primary term or any renewal
or extension, Landlord's cost of maintaining such insurance shall exceed
Landlord's cost of maintaining such insurance for the first full lease year of
the term hereof, Tenant agrees to pay to Landlord, as additional rental, the
amount of such excess (or in the event the premises constitute a portion of a
multiple occupancy building, Tenant's full proportionate share [as defined in
subparagraph 4(B) above] of such excess). Said payments shall be made to
Landlord within ten (10) days after presentation to Tenant of Landlord's
statement setting forth the amount due. Any payment to be made pursuant to this
subparagraph A with respect to the year in which this lease commences or
terminates shall bear the same ratio to the payment which would be required to
be made for the full year as the part of such year covered by the term of this
lease bears to a full year.
B. If the buildings situated upon the premises should be damaged or
destroyed by fire, tornado or other casualty, Tenant shall give immediate
written notice thereof to Landlord.
C. If the buildings situated upon the premises should be totally
destroyed by fire, tornado or other casualty, or if they should be so damaged
thereby that rebuilding or repairs cannot in Landlord's estimation be completed
within two hundred (120) days after the date upon which Landlord is notified by
Tenant of such damage, this lease shall terminate and the rent shall be abated
during the unexpired portion of this lease, effective upon the date of the
occurrence of such damage.
D. If the buildings situated upon the premises should be damaged by any
peril covered by the insurance to be provided by Landlord under subparagraph
12(A) above, but only to such extent that rebuilding or repairs can in
Landlord's estimation be completed within two hundred (120) days after the date
---
upon which Landlord is notified by Tenant of such damage, this lease shall not
terminate, and Landlord shall at its sole cost and expense thereupon proceed
with reasonable diligence to rebuild and repair such buildings to substantially
the contion in which they existed prior to such damage, except that Landlord
shall not be required to rebuild, repair or replace any part of the partitions,
fixtures, additions and other improvements which may have been placed in, on or
about the premises by Tenant. If the premises are untenantable in whole or in
part following such damage, the rent payable hereunder during
11.
<PAGE>
the period in which they are untenantable shall be reduced to such extent as may
be fair and reasonable under all of the circumstances D.). In the event that
Landlord should fail to complete such repairs and rebuilding within two hundred
(120) days after the date upon which Landlord is notified by Tenant of such
damage, Tenant may as its option terminate this lease by delivering written
notice o termination to Landlord as Tenant's exclusive remedy, whereupon all
rights and obligations hereunder shall cease and terminate.
E. Notwithstanding anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage or deed of trust covering the
premises requires that the insurance proceeds be applied to such indebtedness,
then Landlord shall have the right to terminate this lease by delivering written
notice of termination to Tenant within fifteen (15) days after such requirement
is made by any such holder, whereupon all rights and obligations hereunder shall
cease and terminate.
F. Each of Landlord and Tenant hereby releases the other from any loss or
damage to property caused by fire or any other perils insured through or under
them by way of subrogation or otherwise for any loss or damage to property
caused by fire or any other perils insured in policies of insurance covering
such property, even if such loss or damage shall have been caused by the fault
or negligence of the other party, or anyone for whom such party may be
responsible; provided, however, that this release shall be applicable and in
force and effect only with respect to loss or damage occurring during such times
as the releasor's policies shall contain a clause or endorsement to the effect
that any such release shall not adversely affect or impair said policies or
prejudice the right of the releasor to recover thereunder and then only to the
extent of the insurance proceeds payable under such policies. Each of the
Landlord and Tenant agrees that it will request its insurance carriers to
include in its policies such a clause or endorsement. If extra cost shall be
charged therefor, each party shall advise the other thereof and of the amount of
the extra cost, and the other party, at its election, may pay the same, but
shall not be obligated to do so.
13. Liability. Landlord shall not be liable to Tenant or Tenant's
employees, agents, patrons or visitors, or to any other person whomsoever, for
any injury to person or damage to property on or about the premises, to the
extent caused by negligence or misconduct of Tenant, its agents, servants or
employees, or of any other person entering upon the premises, or caused by the
buildings and improvements located on the premises becoming out of repair, or
caused by leakage of gas, oil, water or steam or by electricity emanating from
the premises, and Tenant hereby covenants and agrees that it will at all times
indemnify and hold safe and harmless the property, the Landlord (including
without limitation the trustee and beneficiaries if Landlord is a trust),
Landlord's agents and employees from any loss, liability, claims, suits, costs,
expenses, including without limitation attorney's fees and damage both real and
alleged, arising out of any such damage or injury; except injury to persons or
damage to property the sole cause of which is the negligence of Landlord or the
failure of Landlord to repair any part of the premises which Landlord is
obligated to repair and maintain hereunder within a reasonable time after the
receipt of written notice from Tenant of needed repairs. Tenant shall procure
and maintain throughout the term of this lease a policy or policies of
insurance, at its sole cost and expense, insuring both Landlord and Tenant
against all claims, demands or actions arising out of or in connection with: (i)
the premises; (ii) the condition of the premises; (iii) Tenant's operations in
and maintenance and use of the premises; and (iv) Tenants liability assumed
under this lease, the limits of such policy or policies to be in the amount of
not less than $300,000 per occurrence in respect of injury to persons (including
death), and in the amount of not less than $50,000 per occurrence in respect of
property damage or destruction, including loss of use thereof. All such
policies shall be procured by Tenant from responsible insurance companies
satisfactory to Landlord. Certified copies of such policies, together with
receipt evidencing payment of premiums therefor, shall be delivered to Landlord
prior to the commencement date of this lease. Not less than fifteen (15) days
prior to the expiration date of any such policies. Certified copies of the
renewals thereof (bearing notations evidencing the payment of renewal premiums)
shall be delivered to Landlord. Such policies shall further provide that not
less than thirty (30) days written notice shall be given to Landlord before such
policy may be cancelled or changed to reduce insurance provided thereby. E.)
14. Condemnation.
A. If the whole or any substantial part of the premises should be taken
for any public or quasi-public use under governmental law, ordinance or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof and the taking would prevent or materially interfere with the use of the
premises for the purpose for which they are being used, this lease shall
terminate and the rent shall be abated during the unexpired portion of this
lease, effective upon the earlier of when the physical taking of said premises
shall occur. F.)
B. If part of the premises shall be taken for any public or quasi-public
use under any governmental law, ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu there of, and this lease is not
terminated as provided in the subparagraph above, this lease shall not terminate
but the rent payable hereunder during the unexpired portion of this lease shall
be reduced to such extent as may be fair and reasonable under all of the
circumstances. G.)
C. In the event of any such taking or private purchase in lieu thereof,
Landlord and Tenant shall each be entitled to receive and retain such separate
awards and/or portion of lump sum awards as may be allocated to their respective
interests in any condemnation proceedings.
12.
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15. Holding Over. Tenant will, at the termination of this lease by lapse
of time or otherwise, yield up immediate possession to Landlord. If Landlord
agrees in writing that Tenant may hold over after the expiration or termination
of this lease, unless the parties hereto otherwise agree in writing on the terms
of such holding over, the hold over tenancy shall be subject to termination by
Landlord at any time upon not less than thirty (30) days advance written notice,
or by Tenant at any time upon not less than thirty (30) days advance written
notice, and all of the other terms and provisions of this lease shall be
applicable during that period, except that Tenant shall pay Landlord from time
to time upon demand, as rental for the period of any hold over, an amount equal
to one and one-half (11/2) the rent in effect on the termination date computed
on a daily basis for each day of the hold over period. No holding over by
Tenant, whether with or without consent of Landlord shall operate to extend this
lease except as otherwise expressly provided. The preceding provisions of this
paragraph 15 shall not be construed as Landlord's consent for Tenant to hold
over.
16. Quiet Enjoyment. Landlord covenants that it now has, or will acquire
before Tenant takes possession of the premises, good title to the premises, free
and clear of all liens and encumbrances, excepting only the lien for current
taxes not yet due, such mortgage or mortgages as are permitted by the terms of
this lease, zoning ordinances and other building and fire ordinances and
governmental regulations relating to the use of such property, and easements,
restrictions and other conditions of record. In the event this lease is a
sublease, then tenant agrees to take the premises subject to the provisions of
the prior leases. Landlord represents and warrants that it has full right and
authority to enter into this lease and that Tenant, upon paying the rental
herein set forth and performing its other covenants and agreements herein set
forth, shall peaceably and quietly have, hold and enjoy the premises for the
term hereof without hindrance or molestation from Landlord, subject to the terms
and provisions of this lease.
17. Events of Default. The following events shall be deemed to be events
of default by Tenant under this lease:
(a) Tenant shall fail to pay any installment of the rent herein
reserved when due, or any payment with respect to taxes hereunder when due, or
any other payment or reimbursement to Landlord required herein when due, and
such failure shall continue for a period of five (5) days from the date such
payment was due.
(b) Tenant shall become insolvent, or shall make a transfer in fraud
of creditors, or shall make an assignment for the benefit of creditors.
(c) Tenant shall file a petition under any section or chapter of the
National Bankruptcy Act, as amended, or under any similar law or statute of the
United States or any State thereof; or Tenant shall be adjudged bankrupt or
insolvent in proceedings filed against Tenant thereunder.
(d) A receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant.
(e) Tenant shall desert or vacate any substantial portion of the
premises.
(f) Tenant shall fail to comply with any term, provision or covenant
of this lease (other than the foregoing in this Paragraph 17), and shall not
cure such failure within twenty (20) days after written notice thereof to
Tenant.
18. Remedies. Upon the occurrence of any of such events of default
described in Paragraph 17 hereof, Landlord shall have the option to pursue any
one or more of the following remedies without any notice or demand whatsoever:
(a) Terminate this lease, in which event Tenant shall immediately
surrender the premises to Landlord, and if Tenant fails so to do, Landlord may,
without prejudice in any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the premises and expel or
remove Tenant and any other person who may be occupying such premises or any
part thereof, by force if necessary, without being liable for prosecution or any
claim of damages therefor; and Tenant agrees to pay to Landlord on demand the
amount of all loss and damage which Landlord may suffer by reason of such
termination, whether through inability to relet the premises on satisfactory
terms or otherwise.
(b) Enter upon and take possession of the premises and expel or remove
Tenant and any other person who may be occupying such premises or any part
thereof, by force if necessary, without being liable for prosecution or any
claim for damages therefor, and relet the premises and receive the rent
therefor; and Tenant agrees to pay to the Landlord on demand any deficiency that
may arise by reason of such reletting. In the event Landlord is successful in
reletting the premises at a rental in excess of that agreed to be paid by Tenant
pursuant to the terms of this lease, Landlord and Tenant each mutually agree
that Tenant shall not be entitled, under any circumstances, to such excess
rental, and Tenant does hereby specifically waive any claim to such excess
rental.
(c) Enter upon the premises, by force if necessary, without being
liable for prosecution or any claim for damages therefor, and do whatever Tenant
is obligated to do under the terms of this lease; and Tenant agrees to reimburse
Landlord on demand for any expenses which Landlord may incur in thus effecting
compliance with Tenant's obligations under this lease, and
13.
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Tenant further agrees that Landlord shall not be liable for any damages
resulting to the Tenant from such action
IN THE EVENT TENANT FAILS TO PAY ANY INSTALLMENT OF RENT HEREUNDER AS AND WHEN
SUCH INSTALLMENT IS DUE TO THE ADDITIONAL COST TO LANDLORD FOR
PROCESSING SUCH LATE PAYMENTS TENANT SHALL PAY TO LANDLORD ON DEMAND
EQUAL TO FIVE PERCENT (5%) OF SUCH INSTALLMENT; AND THE FAILURE TO PAY
SUCH AMOUNT WITHIN TEN (10) DAYS AFTER EVENT OF DEFAULT HEREUNDER. THE
PROVISION FOR SUCH LATE CHARGE SHALL BE IN ADDITION TO ALL OF LANDLORD'S
________________________ OR AT LAW AND SHALL NOT BE CONSTRUED AS LIQUIDATED
DAMAGES OR AS LIMITING LANDLORD'S REMEDIES IN _______________.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law, nor
shall pursuit of any remedy herein provided constitute a forfeiture or waiver of
any rent due to Landlord hereunder or of any damages accruing to Landlord by
reason of the violation of any of the terms, provisions and covenants herein
contained. No act or thing done by the Landlord or its agents during the term
hereby granted shall be deemed a termination of this lease or an acceptance of
the surrender of the premises, and no agreement to terminate this lease or
accept a surrender of said premises shall be valid unless in writing signed by
Landlord. No waiver by Landlord of any violation or breach of any of the terms,
provisions and covenants herein contained shall be deemed or construed to
constitute a waiver of any other violation or breach of any of the terms,
provisions and covenants herein contained. Landlord's acceptance of the payment
of rental or other payments hereunder after the occurrence of an event of
default shall not be construed as a waiver of such default, unless Landlord so
notifies Tenant in writing. Forbearance by Landlord to enforce one or more of
the remedies herein provided upon an event of default shall not be deemed or
construed to constitute a waiver of such default or of Landlord's right to
enforce any such remedies with respect to such default or any subsequent
default. If, on account of any breach or default by Tenant in Tenant's
obligations under the terms and conditions of this lease, it shall become
necessary or appropriate for Landlord to employ or consult with an attorney
concerning or to enforce or defend any of Landlord's rights or remedies
hereunder, Tenant agrees to pay any reasonable attorney's fees so incurred.
19. Landlord's Lien. In addition to any statutory lien for rent in
Landlord's favor, Landlord shall have and Tenant hereby grants to Landlord a
continuing security interest for all rentals and other sums of money becoming
due hereunder from Tenant, upon all goods, wares, equipment, fixtures,
furniture, inventory, accounts, contract rights, chattel paper and other
personal property of Tenant situated on the premises, and such property shall
not be removed therefrom without the consent of Landlord until all arrearages in
rent as well as any and all other sums of money then due to Landlord hereunder
shall first have been paid and discharged. In the event of a default under this
lease, Landlord shall have, in addition to any other remedies provided herein or
by law, all rights and remedies under the Uniform Commercial Code, including
without limitation the right to sell the property described in this Paragraph 19
at public or private sale upon five (5) days notice to Tenant. Tenant hereby
agrees to execute such financing statements and other instruments necessary or
desirable in Landlord's discretion to perfect the security interest hereby
created. Any statutory lien for rent is not hereby waived, the express
contractual lien herein granted being in addition and supplementary thereto.
20. Mortgages. Tenant accepts this lease subject and subordinate to any
mortgage(s) and/or deed(s) of trust now or at any time hereafter constituting a
lien or charge upon the premises or the improvements situated thereon, provided,
however, that if the mortgagee, trustee, or holder of any such mortgage or deed
of trust elects to have Tenant's interest in this lease superior to any such
instrument, then by notice to Tenant from such mortgagee, trustee or holder,
this lease shall be deemed superior to such lien, whether this lease was
executed before or after said mortgage or deed of trust. Tenant shall at any
time hereafter on demand execute any instruments, releases or other documents
which may be required by any mortgagee for the purpose of subjecting and
subordinating this lease to the lien of any such mortgage.
21. Landlord's Default. In the event Landlord should become in default in
any payments due on any such mortgage described in Paragraph 20 hereof or in the
payment of taxes or any other items which might become a lien upon the premises
and which Tenant is not obligated to pay under the terms and provisions of this
lease, Tenant is authorized and empowered after giving Landlord five (5) days
prior written notice of such default and Landlord's failure to cure such
default, to pay any such items for and on behalf of Landlord, and the amount of
any item so paid by Tenant for or on behalf of Landlord, together with any
interest or penalty required to be paid in connection therewith, shall be
payable on demand by Landlord to Tenant; provided, however, that Tenant shall
not be authorized and empowered to make any payment under the terms of this
Paragraph 21 unless the item paid shall be superior to Tenant's interest
hereunder. In the event Tenant pays any mortgage debt in full, in accordance
with this paragraph, it shall, at its election, be entitled to the mortgage
security by assignment or subrogation.
22. Mechanic's Liens. Tenant shall have no authority, express or implied,
to create or place any lien or encumbrance of any kind or nature whatsoever
upon, or in any manner to bind, the interest of Landlord in the premises or to
charge the rentals payable hereunder for any claim in favor of any person
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs, and each such claim shall affect and each such
lien shall attach to, if at all, only the leasehold interest granted to Tenant
by this instrument. Tenant covenants and agrees that it will pay or cause to be
paid all sums legally due and payable by it on account of any labor performed or
materials furnished in connection with any work performed on the premises on
which any
14.
<PAGE>
lien is or can be validly and legally asserted against its leasehold interest in
the premises or the improvements thereon and that it will save and hold Landlord
harmless from any and all loss, cost or expense based on or arising out of
asserted claims or liens against the leasehold estate or against the right,
title and interest of the Landlord in the premises or under the terms of this
lease.
23. Notices. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice or the making of any payment
by Landlord to Tenant or with reference to the sending, mailing or delivery of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
(a) All rent and other payments required to be made by tenant to
Landlord hereunder shall be payable to Landlord at the address herein below set
forth or at such other address as Landlord may specify from time to time by
written notice delivered in accordance herewith. Tenant's obligation to pay rent
and any other amounts to Landlord under the terms of this lease shall not be
deemed satisfied until such rent and other amounts have been actually received
by Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address hereinbelow set forth, or at such
other address within the continental United States as Tenant may specify from
time to time by written notice delivered in accordance herewith.
(c) any notice or document required or permitted to be delivered
hereunder shall be deemed to be delivered whether actually received or not when
deposited in the United States Mail, postage prepaid, Certified or Registered
Mail, addressed to the parties hereto at the respective addresses set out below,
or at such other address as they have theretofore specified by written notice
delivered in accordance herewith:
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
Trammell Crow Company Corinth Telecommunication Corp., a subsidiary of
----------------------------- ------------------------------------------------
ALCATEL BUSINESS SYSTEMS, INC.
------------------------------
6000 Poplar Avenue, Suite 300 P.O. Box 831, Fulton Drive
----------------------------- ------------------------------------------------
Memphis, Tennessee 38119 Corinth, Mississippi 38834
----------------------------- ------------------------------------------------
----------------------------- ------------------------------------------------
</TABLE>
If and when included within the term "Landlord", as used in this instrument,
there are more than one person, firm or corporation, all shall jointly arrange
among themselves for their joint execution of such a notice specifying some
individual at some specific address for the receipt of notices and payments to
Landlord; if and when included within the term "Tenant", as used in this
instrument, there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such a notice
specifying some individual at some specific address within the continental
United States for the receipt of notices and payments to Tenant. All parties
included within the terms "Landlord" and "Tenant", respectively, shall be bound
by notices given in accordance with the provisions of this paragraph to the same
effect as if each had received such notice.
24. Miscellaneous.
A. Words of any gender used in this lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
B. The terms, provisions and covenants and conditions contained in this
lease shall apply to, inure to the benefit of, and be binding upon, the parties
hereto and upon their respective heirs, legal representatives, successors and
permitted assigns, except as otherwise herein expressly provided. Landlord
shall have the right to assign any of its rights and obligations under this
lease. Each party agrees to furnish to the other, promptly upon demand, a
corporate resolution, proof of due authorization by partners, or other
appropriate documentation evidencing the due authorization of such party to
enter into this lease.
C. The captions inserted in this lease are for convenience only and in no
way define, limit or otherwise describe the scope or intent of this lease, or
any provision hereof, or in any way affect the interpretation of this lease.
D. Tenant agrees from time to time within ten (10) days after request of
Landlord, to deliver to Landlord, or Landlord's designee, an estoppel
certificate stating that this lease is in full force and effect, the date to
which rent has been paid, the unexpired term of this lease and such other
matters pertaining to this lease as may be requested by Landlord. It is
understood and agreed that
15.
<PAGE>
Tenant's obligation to furnish such estoppel certificates in a timely fashion is
a material inducement for Landlord's execution of this lease.
E. This lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
F. All obligations of tenant hereunder not fully performed as of the
expiration or earlier termination of the term of this lease shall survive the
expiration or earlier termination of the term hereof, including without
limitation all payment obligations with respect to taxes and insurance and all
obligations concerning the condition of the premises. Upon the expiration or
earlier termination of the term hereof, and prior to Tenant vacating the
premises, Tenant shall pay to Landlord any amount reasonably estimated by chosen
by the Tenant as necessary to put the premises, including without limitation all
heating and air conditioning systems and equipment therein, in good condition
and repair I.) Tenant shall also, prior to vacating the premises, pay to
Landlord the amount, as estimated by Landlord, of Tenant's obligation hereunder
for real estate taxes and insurance premiums for the year in which the lease
expires or terminates. All such amounts shall be used and held by Landlord for
payment of such obligations of Tenant hereunder, with Tenant being liable for
any additional costs therefor upon demand by Landlord, or with any excess to be
returned to Tenant after all such obligations have been determined and
satisfied, as the case may be. Any security deposit held by Landlord shall be
credited against the amount payable by Tenant under this Paragraph 24(f).
G. If any clause or provision of this lease is illegal, invalid or
unenforceable under present or future laws effective during the term of this
lease, then and in that event, it is the intention of the parties hereto that
the remainder of this lease shall not be affected thereby, and it is also the
intention of the parties to this lease that in lieu of each clause or provision
of this lease that is illegal, invalid or unenforceable, there be added as a
part of this lease contract a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provision as may be possible and be
legal, valid and enforceable.
H. Because the premises are on the open market and are presently being
shown, this lease shall be treated as an offer with the premises being subject
to prior lease and such offer subject to withdrawal or non-acceptance by
Landlord or to other use of the premises without notice, and this lease shall
not be valid or binding unless and until accepted by Landlord in writing and a
fully executed copy delivered to both parties hereto.
I. All references in this lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this lease.
25. Additional Provisions. SEE ATTACHMENT.
EXECUTED BY LANDLORD, this 20th day of July, 1989.
Attest/Witness CMSMI-WILLOW 810, LIMITED PARTNERSHIP
/s/ Brenda Braman By: TCC Memphis Industrial Development
- -------------------------------- ---------------------------------------
Managing General Partner
Title: Administrative Assistant By: /s/ Dudley Mitchell
------------------------- ------------------------------------
Dudley Mitchell
President
EXECUTED BY TENANT, this ____ day
of _____, 19___
Attest/Witness CORINTH TELECOMMUNICATIONS CORP., A
SUBSIDIARY OF ALCATEL BUSINESS SYSTEMS,
/s/ Shelia A Morrow By: /s/ Steve J. Fry
- ---------------------------- ------------------------------------
Title: Executive Secretary Title: President
---------------------- ---------------------------------
16.
<PAGE>
25. ADDITIONAL PROVISIONS.
A.) general office uses, sales, administration, engineering and testing of
communication equipment.
B.) Provided Landlord gives to Tenant at least 24 hour notice unless such
notice is waived by Tenant.
C.) Tenant's space shall be separately metered.
D.) In the event Landlord and Tenant cannot agree on a fair and reasonable
reduction in rent, Landlord and Tenant shall select a mutually agreed upon
neutral third party to decide upon the rental reduction. The decision of this
third party shall be binding.
E.) To the extent not covered by the insurance to be provided by Tenant as
requested above; Landlord shall indemnify and hold harmless the Tenant's
employees, agents, or invitees from any loss, liability, claims, suits, costs,
and expenses including without limitation any reasonable attorney fees arising
out of negligence of Landlord or the failure of Landlord to repair any part of
the premises which Landlord is obligated to repair and maintain within a
reasonable time after receipt of written notice from Tenant of needed repairs
except injury to persons or property the sole cause of which is the negligence
or misconduct of Tenant, employees, agents or invitees.
F.) or receipt of written confirmation from the appropriate governmental
authority of such taking.
G.) In the event Landlord and Tenant cannot agree on a fair and reasonable
reduction in rent, Landlord and Tenant shall select a mutually agreed upon
neutral third party to decide upon the rental reduction. The decision of this
third party shall be binding.
H.) except those damages caused by the negligence of the Landlord or by
the Landlord's misconduct.
I.) Tenant may choose its own independent contractor to perform such work
provided such work compiles with standard Trammell Crow construction
specifications attached to and made a part of this Lease Agreement.
J.) Landlord will provide tenant improvements as delineated in Exhibit "B"
of this Lease Agreement. These tenant improvements will be constructed to
Trammell Crow's specifications attached hereto and made a part of this Lease
Agreement. Any tenant improvements not shown in Exhibit "B" of this Lease
Agreement or any additional tenant improvements over and above standard Trammell
Crow specifications attached hereto and made a part hereof shall be paid for by
the Tenant. Trammell Crow will supply standard 30 ounce plush carpeting in those
areas indicated on Exhibit "B" of this Lease Agreement and standard vinyl
composition tile in those areas delineated in Exhibit "B" of this Lease
Agreement. Trammell Crow will supply a $.30 per square foot allowance for vinyl
wallcovering. Any overages above $.30 per square foot for more expensive vinyl
wallcovering shall be paid for by the Tenant.
K.) The term "Hazardous Substances," as used in this lease shall mean
pollutants, contaminants, toxic or hazardous wastes, or any other substances,
the removal of which is required or the use of which is restricted, prohibited
or penalized by any "Environmental Law," which term shall mean any federal,
state or local law or ordinance relating to pollution or protection of the
environment. Tenant hereby agrees that (i) no activity will be conducted on the
premises that will produce any Hazardous Substance, except for such activities
that are part of the ordinary course of Tenant's business activities that are
part of the ordinary course of Tenant's business (the "Permitted Activities")
provided said Permitted Activities are conducted in accordance with all
Environment Laws and have been approved in advance in writing by Landlord: (ii)
the premises will not be used in any manner for the storage of any Hazardous
Substances except for the temporary storage of such materials that are used in
the ordinary course of Tenant's business (the "Permitted Materials") provided
such Permitted Materials are properly stored in a manner and location meeting
all Environmental Laws and approved in advance in writing by Landlord: (iii) no
portion of the premises will be used as a landfill or dump: (iv) Tenant will not
install any underground tanks of any type: (v) Tenant will not allow any surface
or subsurface conditions to exist or come into existence that constitute, or
with the passage of time may constitute, a public or private nuisance: (vi)
Tenant will not permit any Hazardous Substances to be brought onto the premises,
except for the Permitted Materials described below, and if so brought or found
located thereon, the same shall be immediately removed, with proper disposal,
and all required cleanup procedures shall be diligently undertaken pursuant to
all Environmental Laws. If, at any time during or after the term of the lease,
the premises is found to be so contaminated or subject to said conditions,
Tenant agrees to indemnify and hold Landlord harmless from all claims, demands,
actions, liabilities, costs, expenses, damages and obligations of any nature
arising from or as a result of the use of the premises by Tenant. The foregoing
indemnification shall survive the termination or expiration of this lease.
L.) Landlord shall have the right at any time during the term hereof, upon
giving Tenant not less than sixty (60) days prior written notice, to provide and
furnish Tenant with space elsewhere in the property of approximately the same
size as the Premises and remove and place Tenant in such space, with Landlord to
pay all reasonable costs and expenses incurred as a result of
17.
<PAGE>
such removal of Tenant. Should Tenant refuse to permit Landlord to move Tenant
to such new space at the end of said sixty (60) days period, Landlord shall have
the right to cancel and terminate this Lease effective ninety (90) days from the
date of original notification by Landlord. If Landlord moves Tenant to such new
space, this Lease and each and all of its terms, covenants and conditions shall
remain in full force and effect and be deemed applicable to such new space and
such new space shall thereafter be deemed to be the Premises as though Landlord
and Tenant had entered into an expressed written amendment of this Lease with
respect thereto.
M.) Landlord agrees to contract for an/or provide trash collection and
containers for trash at the above described project and to provide necessary
landscape, lawn maintenance, parking lot cleanup and water as provided by
Memphis Light, Gas and Water Division but to be metered in Tenant's space for
the entire project. The cost of providing the trash container and charges for
trash collection, as well as landscape, lawn maintenance and parking lot cleanup
and water as provided by Memphis Light, Gas & Water Division, but to be metered
in Tenant's space, shall be paid for by Tenant. Landlord will pay for said
services and bill on a monthly or quarterly basis for its pro rata share based
on the percentage that Tenant occupies in relationship to the total square
footage in above described project. The percentage of any unleased space shall
be the expense of the Landlord. Tenant agrees to reimburse Landlord for such
expenses within ten (10) days of receipt of the invoice submitted for said
services. Landlord agrees to maintain above described project in an orderly and
"Class A" manner at all times; however, agrees to provide above described
services at a competitive price. Common Area Maintenance (CAM) shall not exceed
$.25 per square foot during the initial term of this Lease Agreement. In no
event shall Common Area Maintenance (CAM) exceed $.20 per square foot during
1989 and 1990.
N.) Landlord will supply and install blinds for the Leased Premises.
O.) Tenant shall be responsible for the transportation of the Tenant's
Liebert unit to the Leased Premises. Landlord will be responsible for installing
said Liebert unit.
P.) It is hereby agreed by and between the parties hereto that Tenant
shall be and is hereby granted occupancy of the Leased Premises on a rent-free
basis upon the terms and conditions of the Lease Agreement (excluding the
payment of rent) from October 1, 1989 to April 30, 1990. Upon the expiration of
the above described rent-free period, all terms and conditions of the Lease
Agreement (including the payment of rent) shall be in force and effect without
action by either party hereto. Should the commencement date change Landlord will
have seven (7) months free rent starting from the new commencement date.
Q.) Provided Tenant is not in default hereunder, Tenant shall have an
option to lease an additional 6,793 square feet of space located on the adjacent
west side of Tenant's current Leased Premises as referenced in Exhibit "C" which
is attached hereto and made a part hereof, hereinafter referred to as the
"Expansion Premises" by giving written notice to the Landlord. Landlord agrees
with respect to the "Expansion Premises" that any lease with any other Tenant
for the 6,793 square feet shall contain a clause permitting Landlord to relocate
such Tenant to other space in Willow Lake Business Park provided, that such
space is available. Landlord shall not be liable or considered in default of
this Lease Agreement should Landlord not have space available to relocate any
existing tenant that might be located within the "Expansion Premises". Upon
receipt of written request from Tenant, Landlord shall promptly meet and
negotiate with Tenant as to the rental rate so that Tenant may decide whether to
exercise its expansion option. This option is given upon the following
additional terms and conditions: 1.) Landlord will commence the relocation
process of any existing tenant in the "Expansion Premises" if any, upon the
execution of a mutually acceptable lease agreement for the "Expansion Premises".
Promptly upon receipt of Tenant's notice of exercising his option to lease
additional space, Landlord shall prepare and provide Tenant with a written lease
agreement consisting with the terms hereof. 2.) Alcatel shall not be liable for
any costs associated with the relocation of existing tenants in the "Expansion
Premises". 3.) The option to lease additional space in the "Expansion Premises"
shall be an ongoing option applicable throughout the term of this lease as well
an into any option periods. Should Tenant decide to exercise this option to
expand, Tenant must expand by the entire 6,793 square feet. 4.) Provided that
Tenant notifys Landlord in writing of its election to expand its premises,
Tenant shall have the right to lease the "Expansion Premises" under the same
terms and conditions of this Lease Agreement except the rental rate shall be the
current market rate for comparable space in Willow Lake Business Park. Landlord
shall provide Tenant will possession of the "Expansion Premises" not more than
ninety (90) days after the receipt of a fully executed lease agreement for such
"Expansion Premises", except in such case that improvements, requested by Tenant
for completion by Landlord, reasonably require additional time for the
substantial completion. Landlord agrees to use reasonable diligence to deliver
possession of the "Expansion Premises" within the period set forth above.
However, Landlord shall not be liable for the failure to give possession of the
"Expansion Premises" within the time set forth above by reason of the holding
over or retention of possession by any tenant of the "Expansion Premises", nor
shall such failure impair the validity of this Lease Agreement; provided, that
Landlord shall use its best efforts to cause the prompt removal of any such
tenants.
18.
<PAGE>
R.) In the event that Tenant's space is substantially not ready for
occupancy by October 1st due to significant delays in construction of the leased
premises, Landlord will amend this Lease Agreement to reflect a later start date
and later expiration date to allow for the completion of leasehold improvements.
LANDLORD /s/DM
-----
TENANT /s/SJF
------
19.
<PAGE>
S.) In addition, Tenant agrees to deposit with Landlord the date hereof
the sum of fifty thousand dollars and no cents Dollars ($50,000.00), which sum
be held by Landlord without obligation for interest, as security for the
performance of Tenant's covenants and obligations under this lease, it being
expressly understood and agreed that such deposit is not an advance rental
deposit or a measure of Landlord's damages in case of Tenant's default. Upon the
occurrence of any event of default by Tenant, Landlord may, from time to time
without prejudice to any other remedy provided herein or provided by law, use
such fund to the extent necessary to make good any arrears of rent or other
payments due Landlord hereunder, and any other damage, injury, expense or
liability caused by such event of default; and Tenant shall pay to Landlord on
demand the amount so applied in order to restore the security deposit to its
original amount. Although the security deposit shall be deemed the property of
Landlord, any remaining balance of such deposit shall be returned by Landlord
immediately following the end of the third year of this lease.
LANDLORD /s/DM
------
TENANT /s/SJF
-------
20.
<PAGE>
EXHIBIT "A" TO LEASE AGREEMENT NO. 2267 DATED 07/24/89 BY AND
- -------------------------------------------------------------
BETWEEN CMSMI-WILLOW 810, LIMITED PARTNERSHIP AND CORINTH
- ---------------------------------------------------------
TELECOMMUNICATIONS CORP., A SUBSIDIARY OF ALCATEL BUSINESS
- ----------------------------------------------------------
SYSTEMS, INC.
- -------------
PREMISES: Said space shall consist of approximately 368 square feet of
- ---------
warehouse space and approximately 14,927 square feet of office space for a total
of 15,295 square feet located at 4119 Willow Lake Boulevard, Willow Lake
Business Park, Building No. 8, Memphis, Tennessee 38118.
LANDLORD /s/DM
------
TENANT /s/SJF
--------
21.
<PAGE>
[DIAGRAM]
22.
<PAGE>
EXHIBIT 10.10
INDUSTRIAL LEASE AGREEMENT
BETWEEN
INDUSTRIAL DEVELOPMENTS INTERNATIONAL (GEORGIA), L.P.
AS LANDLORD
AND
BCS TECHNOLOGIES, INC.
AS TENANT
<PAGE>
TABLE OF CONTENTS
<TABLE>
PAGE
<S> <C>
1. Basic Lease Provisions................................................. 1
2. Demised Premises....................................................... 2
3. Term................................................................... 3
4. Base................................................................... 3
5. Intentionally Omitted.................................................. 3
6. Operating Expenses and Additional Rent................................. 3
7. Use of Demised Premises................................................ 5
8. Insurance.............................................................. 5
9. Utilities.............................................................. 7
10. Maintenance and Repairs................................................ 7
11. Tenant's Personal Property............................................. 8
12. Tenant's Fixtures...................................................... 9
13. Signs.................................................................. 9
14. Intentionally Omitted.................................................. 9
15. Governmental Regulations............................................... 9
16. Environmental Matters.................................................. 10
17. Construction of Demised Premises....................................... 11
18. Tenant Alterations and Additions....................................... 14
19. Services by Landlord................................................... 15
20. Fire and Other......................................................... 15
21. Condemnation........................................................... 15
22. Tenant's Default....................................................... 16
23. Landlord's Right of Entry.............................................. 20
24. Lender's Rights........................................................ 20
25. Estoppel Certificate................................................... 21
26. Landlord Liability..................................................... 22
27. Notices................................................................ 22
28. Brokers................................................................ 22
29. Assignment and Subleasing.............................................. 22
30. Termination or Expiration.............................................. 24
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C>
31. Intentionally Omitted................................................ 24
32. Late Payments........................................................ 24
33. Rules and Regulations................................................ 25
34. Quiet Enjoyment...................................................... 25
35. Miscellaneous........................................................ 25
36. Special Stipulations................................................. 26
37. Lease Date........................................................... 26
38. Authority............................................................ 26
39. No Offer Until Executed.............................................. 26
EXHIBIT "A" Demised Premises
EXHIBIT "B" Preliminary Plans and Specifications
EXHIBIT "C" Special Stipulations
EXHIBIT "D" Rules and Regulations
EXHIBIT "E" Certificate of Authority
</TABLE>
ii
<PAGE>
INDUSTRIAL LEASE AGREEMENT
--------------------------
THIS INDUSTRIAL LEASE AGREEMENT (the "Lease") is made as of the "Lease
Date" (as defined in Section 37 herein) by and between INDUSTRIAL DEVELOPMENTS
INTERNATIONAL (GEORGIA), L.P., a Georgia limited partnership ("Landlord"), and
BCS TECHNOLOGIES, INC., a Delaware corporation ("Tenant") (the words "Landlord"
and "Tenant" to include their respective legal representatives, successors and
permitted assigns where the context requires or permits).
WITNESSETH:
1. BASIC LEASE PROVISIONS. The following constitute the basic provisions
of this Lease:
(a) Demised Premises Address: 4105 Royal Drive, Suite 100
Kennesaw, Georgia 30144
(b) Demised Premises Square Footage: approximately 24,648 sq. ft.
(c) Building Square Footage: approximately 123,648 sq. ft.
(d) Annual Base Rent
Lease Year 1 $132,174.90
Month 1: $ 0.00
Months 2-12: $132,174.90
Lease Year 2 $146,902.08
Lease Year 3 $146,902.08
Lease Year 4 $153,528.88
Lease Year 5 $155,528.88
Lease Year 6 $155,528.88
(e) Monthly Base Rent Installments
Lease Year 1
Month 1: $ 0.00
Months 2-12: $12,015.90
Lease Year 2 $12,241.84
Lease Year 3 $12,241.84
Lease Year 4 $12,960.74
1
<PAGE>
Lease Year 5 $12,960.74
Lease Year 6 $12,960.74
(f) Lease Commencement Date: May 1, 1999
(g) Base Rent Commencement Date: June 1, 1999
(h) Expiration Date. April 30, 2005
(i) Term: 6 years
(j) Tenant's Operating Expense Percentage: 19.93%
(k) Security Deposit: N/A
(l) Permitted Use: Development, assembly, sales and distribution of
electronic communication devices and office and administrative
uses reasonably incidental thereto.
(m) Address for notice:
Landlord: Industrial Developments International
(Georgia), L.P.
c/o Industrial Developments International, Inc.
3424 Peachtree Road, N.E., Suite 1500
Atlanta, Georgia 30326
Attn: Vice President - Operations
Tenant: BCS Technologies, Inc,
8400 East Prentice Avenue
Suite 1320
Englewood, Colorado 80111
Attn: David Fredrick, President
(n) Address for rental payments:
Industrial Developments International
(Georgia), L.P.
c/o IDI Services Group, Inc.
P.O. Box 930190
Atlanta, Georgia 31193
(o) Broker(s): Cushman & Wakefield
Attn: Charles Craighill
2. DEMISED PREMISES. For and in consideration of the rent hereinafter
reserved and the mutual covenants hereinafter contained, Landlord does hereby
lease and demise unto Tenant,
2.
<PAGE>
and Tenant does hereby hire, lease and accept, from Landlord all upon the terms
and conditions hereinafter set forth the following premises, referred to as the
"Demised Premises", as outlined on Exhibit attached hereto and incorporated
herein: approximately 24,648 square fact of space, approximately 10,700 square
fact of which is office space, having an address as set forth in Section 1(a),
located within Building B (the "Building"), which contains a total of
approximately 123,648 square feet and is located within Northpark 75 (the
"Project"), located in Cobb County, Georgia.
3. TERM. To have and to hold the Demised Premises for a preliminary term
(the "Preliminary Term") commencing on the Lease Date and ending on the Lease
Commencement Date as set forth in Section 1(f), and a primary term (the "Primary
Term") commencing on the Lease Commencement Date and terminating on the
Expiration Date as at forth in Section 1(h), as the Lease Commencement Date and
the Expiration Date may be revised pursuant to Section 17 (the Preliminary Term,
the Primary Term, and any and all extensions thereof, herein referred to as the
"Term"). The term "Lease Year" shall mean each one (1) year period of the Term
(or portion thereof if the last Lease Year of the Term is less than one (1) full
year) beginning on the Lease Commencement Date, and each anniversary thereof,
and ending on the day immediately prior to the next succeeding anniversary of
the Lease Commencement Date.
4. BASE. Tenant shall pay to Landlord at the address set forth in
Section 1(n), as base rent for the Demised Premises, commencing on the Base Rent
Commencement Date and continuing throughout the Term in lawful money of the
United States, the annual amount set forth in Section 1(d) payable in equal
monthly installments as set forth in Section 1(e) (the "Base Rent"), payable in
advance, without demand and without abatement, reduction, set-off or deduction,
on the first day of each calendar month during the Term. If the Base Rent
Commencement Date shall fall on a day other than the first day of a calendar
month, the Base Rent shall be apportioned pro rata on a per diem basis (i) for
the period between the Base Rent Commencement Date and the first day of the
following calendar mouth (which pro rata. payment shall be due and payable on
the Base Rent Commencement Date), and (ii) for the last partial month of the
Term, if applicable. No payment by Tenant or receipt by Landlord of rent
hereunder shall be deemed to be other than on account of the amount due, and no
endorsement or statement on any check or any letter accompanying any check or
payment of rent shall be deemed an accord and satisfaction, and Landlord may
accept such check as payment without prejudice to Landlord's right to recover
the balance of such installment or payment of rent or pursue any other remedies
available to Landlord.
5. Intentionally Omitted.
6. OPERATING EXPENSES AND ADDITIONAL RENT.
(a) Tenant agrees to pay as Additional Rent (as defined in Section
6(b) below) its proportionate share of Operating Expenses (as hereinafter
defined). "Operating Expenses" shall be defined as all reasonable expenses for
operation, repair, replacement and maintenance as necessary to keep the Building
and the common areas, driveways, and parking areas associated therewith
(collectively, the "Building Common Area") in good order, condition and repair,
including but not limited to, utilities for the Building Common Area, expenses
associated with the driveways and parking areas (including sealing and
restriping, and snow, trash and ice
3.
<PAGE>
removal), security systems, fire detection and prevention systems, lighting
facilities, landscaped areas, walkways, painting and caulking, directional
signage, curbs, drainage strips, sewer lines, all charges assessed against or
attributed to the Building pursuant to any applicable easements, covenants,
restrictions, agreements, declaration of protective covenants or development
standards, property management fees, all real property taxes and special
assessments imposed upon the Building, the Building Common Area and the land on
which the Building and the Building Common Area are constructed, all costs of
insurance paid by Landlord with respect to the Building and the Building Common
Area, and costs of improvements to the Building and the Building Common Area
required by any law, ordinance or regulation applicable to the Building and the
Building Common Area generally (and not because of the particular use of the
Building or the Building Common Area by a particular tenant), which cost shall
be amortized on a straight line basis aver the useful life of such improvement,
as reasonably determined by Landlord. Operating Expenses shall not include
expenses for the costs of any maintenance and repair required to be performed by
Landlord at its own expense under Section (10)(b). Further, Operating Expenses
shall not include the costs for capital improvements unless such costs are
incurred for the purpose of causing a material decrease in the Operating
Expenses of the Building or the Building Common Area or are made with respect to
improvements made to comply with laws, ordinances or regulations as described
above. The proportionate share of Operating Expenses to be paid by Tenant shall
be a percentage of the Operating Expenses based upon the proportion that the
square footage of the Demised Premises bears to the total square footage of the
Building (such figure referred to as "Tenant's Operating Expense Percentage" and
set forth in Section 1(j). Prior to or promptly after the beginning of each
calendar year during the Term, Landlord shall estimate the total amount of
Operating Expenses to be paid by Tenant during each such calendar year and
Tenant shall pay to Landlord one-twelfth (1/12) of such sum on the first day of
each calendar month during each such calendar year, or part thereof, during the
Term. Within a reasonable time after the end of each calendar year, Landlord
shall submit to Tenant a statement of the actual amount of Operating Expenses
for such calendar year, and the actual amount owed by Tenant, and within thirty
(30) days after receipt of such statement Tenant shall pay any deficiency
between the actual amount owed and the estimates paid during such calendar year,
or in the event of overpayment, Landlord shall credit the amount of such
overpayment toward the next installment of Operating Expenses owed by Tenant or
remit such overpayment to Tenant if the Term has expired or has been terminated
and no Event of Default exists hereunder. The obligations in the immediately
preceding sentence shall survive the expiration or any earlier termination of
this Lease. If the Lease Commencement Date shall fall on other than the first
day of the calendar year, and/or if the Expiration Date shall fall on other than
the last day of the calendar year, Tenant's proportionate share of the Operating
Expenses for such calendar year shall be apportioned pro rata.
(b) Any amounts required to be paid by Tenant hereunder (in addition
to Base Rent) and any charges or expenses incurred by Landlord on behalf of
Tenant under the terms of this Lease shall be considered "Additional Rent"
payable in the same manner and upon the same terms and conditions as the Base
Rent reserved hereunder except as set forth herein to the contrary. Any failure
on the part of Tenant to pay such Additional Rent when and as the same shall
become due shall entitle Landlord to the remedies available to it for non-
payment of Base Rent. Tenant's obligations for payment of Additional Rent shall
begin to accrue on the Base Rent Commencement Date.
4.
<PAGE>
(c) If applicable in the jurisdiction where the Demised Promises are
located, Tenant shall pay and be liable for all rental, sales, use and inventory
taxes or other similar taxes, if any, on the amounts payable by Tenant hereunder
levied or imposed by any city, state, county or other governmental body having
authority, such payments to be in addition to all other payments required to be
paid Landlord by Tenant under the term of this Lease. Such payment shall be
made by Tenant directly to such governmental body if billed to Tenant, or if
billed to Landlord, such payment shall be paid concurrently with the payment of
the Base Rent, Additional Rent, or such other charge upon which the tax is
based, all as set forth herein.
7. USE OF DEMISED PREMISES.
(a) The Demised Premises shall be used for the Permitted Use set
forth in Section 1(1) and for no other purpose.
(b) Tenant will permit no liens to attach or exist against the
Demised Premises, and shall not commit any waste.
(c) The Demised Premises shall not be used for any illegal purposes,
and Tenant shall not allow, suffer, or permit any vibration, noise, odor, light
or other effect to occur within or around the Demised Premises that could
constitute a nuisance or trespass for Landlord or any occupant of the Building
or an adjoining building, its customers, agents, or invitees. Upon notice by
Landlord to Tenant that any of the aforesaid prohibited uses are occurring,
Tenant agrees to promptly remove or control the same.
(d) Tenant shall not in any way violate any law, ordinance or
restrictive covenant affecting the Demised Premises, and shall not in any manner
use the Demised Premises so as to cause cancellation of, prevent the use of, or
increase the rate of, the fire and extended coverage insurance policy required
hereunder. Landlord makes no (and does hereby expressly disclaim any) covenant,
representation or warranty as to the Permitted Use being allowed by or being in
compliance with any applicable laws, rules, ordinances or restrictive covenants
now or hereafter affecting the Demised Premises, and any zoning letters, copies
of zoning ordinances or other information from any governmental agency or other
third party provided to Tenant by Landlord or any of Landlord's agents or
employees shall be for informational purposes only. Tenant hereby expressly
acknowledging and agreeing that Tenant shall conduct and rely solely on its own
due diligence and investigation with respect to the compliance of the Permitted
Use with all such applicable laws, rules, ordinances and restrictive covenants
and not on any such information provided by Landlord or any of its agents or
employees.
(e) In the event insurance premiums pertaining to the Demised
Premises, the Building, or the Building Common Area, whether paid by Landlord or
Tenant, are increased over the least hazardous rate available due to the nature
of the use of the Demised Premises by Tenant, Tenant shall pay such additional
amount as Additional Rent.
8. INSURANCE.
(A) Tenant covenants and agrees that from and after the Lease
Commencement Date or any earlier date upon which Tenant enters or occupies the
Demised
5.
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Premises or any portion thereof, Tenant will carry and maintain, at its sole
cost and expense, the following types of insurance, in the amounts specified and
in the form hereinafter provided for:
(I) Liability insurance in the Commercial General Liability
form (or reasonable equivalent thereto) covering the Demised Premises and
Tenant's use thereof against claims for bodily injury or death, property damage
and product liability occurring upon, in or about the Demised Premises, such
insurance to be written on an occurrence basis (not a claims made basis), to be
in combined single limits amounts not less than $2,000,000.00 and to have
general aggregate limits of not less than $5,000,000.00 for each policy year.
The insurance coverage required under this Section 8(a)(i) shall, in addition,
extend to any liability of Tenant arising out of the indemnities provided for in
Section 11 and, if necessary, the policy shall contain a contractual endorsement
to that effect.
(II) Insurance covering (A) all of the item included in the
leasehold improvements constructed in the Demised Premises by or at the expense
of Landlord (collectively, the "Improvements"), including but not limited to
demising walls and the heating, ventilating and air conditioning system and (B)
Tenant's trade fixtures, merchandise and personal property from time to time in,
on or upon the Demised Premises, in an amount not less than one hundred percent
(100%) of their full replacement value from time to time during the Term,
providing protection against perils included within the standard form of "all-
risks" fire and casualty insurance policy, together with insurance against
sprinkler damage, vandalism and malicious mischief. Any policy proceeds from
such insurance relating to the Improvements shall be used solely for the repair,
construction and restoration or replacement of the Improvements damaged or
destroyed unless this Lease shall cease and terminate under the provisions of
Section 20.
(b) All policies of the insurance provided for in Section 8(a) shall
be issued in form reasonably acceptable to Landlord by insurance companies with
a rating of not less than "A," and financial size of not less than Class XII, in
the most current available "Best Insurance Reports", and licensed to do
business in the state in which the Building is located. Each and every such
policy:
(I) shall name Landlord, Lender (as defined in Section 24),
and any other party reasonably designated by Landlord, as an additional insured.
In addition, the coverage described in Section 8(a)(ii)(A) relating to the
Improvements shall also name Landlord as "loss payee";
(II) shall be delivered to Landlord, in the form of an
insurance certificate acceptable to Landlord as evidence of such policy, prior
to the Lease Commencement Date and thereafter within thirty (30) days prior to
the expiration of each such policy, and, as often as any such policy shall
expire or terminate. Renewal or additional policies shall be procured and
maintained by Tenant in like manner and to like extent;
(III) shall contain a provision that the insurer will give to
Landlord and such other parties in interest at least fifteen (15) days notice in
writing in advance of any material change, cancellation, termination or lapse,
or the effective date of any reduction in the amounts of insurance; and
6.
<PAGE>
(IV) shall be written as a primary policy which does not
contribute to and is not in excess of coverage which Landlord may carry.
(c) In the event that Tenant shall fail to carry and maintain the
insurance coverages set forth in this Section 8, Landlord may upon thirty (30)
days notice to Tenant (unless such coverages will lapse in which event no such
notice shall be necessary) procure such policies of insurance and Tenant shall
promptly reimburse Landlord therefor.
(d) Landlord and Tenant hereby waive any rights each may have against
the other on account of any loss or damage occasioned to Landlord or Tenant, as
the case may be, their respective property, the Demised Premises, its contents
or to the other portions of the Building, arising from any risk covered by all
risks fire and extended coverage insurance of the type and amount required to be
carried hereunder, provided that such waiver does not invalidate such policies
or prohibit recovery thereunder. The parties hereto shall cause their respective
insurance companies insuring the property of either Landlord or Tenant against
any such loss, to waive any right of subrogation that such insurers may have
against Landlord or Tenant, as the case may be.
9. UTILITIES. During the Term, Tenant shall promptly pay as billed to
Tenant all rents and charges for water and sewer services and all costs and
charges for gas, steam, electricity, fuel, light, power, telephone, heat and any
other utility or service used or consumed in or servicing the Demised Premises
and all other costs and expenses involved in the care, management and use
thereof. To the extent reasonably possible, such utilities shall be separately
metered and billed to Tenant. Any utilities which are not separately metered
shall be billed to Tenant by Landlord at Landlord's actual cost. In the event
Tenant's use of any utility not metered is in excess of the average use by other
tenants, Landlord shall have the right to install a meter for such utility, at
Tenant's expense, and bill Tenant for Tenant's actual use. If Tenant fails to
pay any utility bills or charges, Landlord may, at its option and following
written notice to Tenant, pay the same and in such event, the amount of such
payment together with interest thereon at the Interest Rate as defined in
Section 32 from the date of such payment by Landlord, will be added to Tenant's
next due payment as Additional Rent. Landlord represents to Tenant that as of
the Lease Commencement Date, the Demised Premises will be separately metered for
electricity, telephone and all other utilities, other than water, sewer, the
outside lighting, and the Project alarm system, the costs of which are billed to
Landlord and charged to Tenant pursuant to Section 6.
10. MAINTENANCE AND REPAIRS.
(a) Tenant shall, at its own cost and expense, maintain in good
condition and repair the interior of the Demised Premises, including but not
limited to the heating, air conditioning and ventilation system, glass, windows
and doors, sprinkler, all plumbing and sewage systems, fixtures, interior walls,
floors (including floor slabs), ceilings, storefronts, plate glass, skylights,
all electrical facilities and equipment including, without limitation, lighting
fixtures, lamps, fans and any exhaust equipment and systems, electrical motors,
and all other appliances and equipment (including, without limitation, dock
levelers, dock shelters, dock seals and dock lighting) of every kind and nature
located in, upon or about the Demised Premises, except as to such maintenance
and repair as is the obligation of Landlord pursuant to Section
7.
<PAGE>
10(b). During the Term, Tenant shall maintain in full force and affect a service
contract for the maintenance of the heating, ventilation and air conditioning
systems with an entity reasonably acceptable to Landlord. Tenant shall deliver
to Landlord (i) a copy of said service contract within thirty (30) days after
the Lease Commencement Date, and (ii) thereafter, a copy of a renewal or
substitute service contract within thirty (30) days prior to the expiration of
the existing service contract. Tenant's obligation shall exclude any maintenance
and repair required because of the act or negligence of Landlord, its employees,
contractors or agents, which shall be the responsibility of Landlord.
(b) Landlord shall, at its own cost and expense, maintain in good
condition and repair the roof, foundation (beneath the floor slab), exterior
glass, structural frame of the Building, all plumbing and electrical lines
serving the Demised Premises from the boundary of the Demised Premises to the
point at which such line is maintained by the entity providing such utility, and
all plumbing and electrical lines serving the Demised Premises and located in
the floor slab or other structural components of the Building. Landlord's
obligation shall exclude the cost of any maintenance or repair required because
of the act or negligence of Tenant or Tenant's agents, contractors, employees
and invitees (collectively, "Tenant's Affiliates"), the cost of which shall be
the responsibility of Tenant.
(c) Unless the same is caused solely by the negligent action or
inaction of Landlord, its employees or agents, and is not covered by the
insurance required to be carried by Tenant pursuant to the terms of this Lease,
Landlord shall not be liable to Tenant or to any other person for any damage
occasioned by failure in any utility system or by the bursting or leaking of any
vessel or pipe in or about the Demised Premises, or for any damage occasioned by
water coming into the Demised Premises or arising from the acts or neglects of
occupants of adjacent property or the public.
11. TENANT'S PERSONAL PROPERTY. All of Tenant's personal property in the
Demised Premises shall be and remain at Tenant's sole risk. Landlord, its
agents, employees and contractors, shall not be liable for, and Tenant hereby
releases Landlord from, any and all liability for theft thereof or any damage
thereto occasioned by any act of God or by any acts, omissions or negligence of
any persons. Landlord, its agents, employees and contractors, shall not be
liable for any injury to the person or property of Tenant or other persons in or
about the Demised Premises, Tenant expressly agreeing to indemnify and save
Landlord, its agents, employees and contractors, harmless, in all such cases,
except to the extent caused by the negligence of Landlord, its agents, employees
and contractors. Tenant further agrees to indemnify and reimburse Landlord for
any costs or expenses, including, without limitation, attorneys' fees, that
Landlord reasonably may incur in investigating, handling or litigating any such
claim against Landlord by a third person, unless such claim arose from the
negligence of Landlord, its agents, employees or contractors. Furthermore, in
case any such claim is brought against Landlord, Tenant agrees to defend
Landlord against such claim, at Tenant's sole expense, by counsel reasonably
satisfactory to Landlord, and Landlord shall reasonably cooperate with Tenant
and Tenant's counsel in connection therewith. The provisions of this Section 11
shall survive the expiration or earlier termination of this Lease with respect
to any damage, injury or death occurring before such expiration or termination.
8.
<PAGE>
12. TENANT'S FIXTURES. Tenant shall have the right to install in the
Demised Premises trade fixtures required by Tenant or used by it in its
business, and if installed by Tenant, to remove any or all such trade fixtures
from time to time during and upon termination or expiration of this Lease,
provided no Event of Default, as defined Section 22, then exists; provided,
however, that Tenant shall repair and restore any damage or injury to the
Demised Premises (to the condition in which the Demised Premises existed prior
to such installation) caused by the installation and/or removal of any such
trade fixtures.
13. SIGNS. No sign, advertisement or notice shall be inscribed, painted,
affixed, or displayed on the windows or exterior walls of the Demised Promises
or an any public area of the Building, except in such places, numbers, sizes,
colors and styles as are approved in advance in writing by Landlord, and which
conform to all applicable laws, ordinances, or covenants affecting the Demised
Premises. Any and all signs installed or constructed by or on behalf of Tenant
pursuant hereto shall be installed, maintained and removed by Tenant at Tenant's
sole cost and expense,
14. Intentionally Omitted.
15. GOVERNMENTAL REGULATIONS. Tenant shall promptly comply throughout the
Term, at Tenant's sole cost and expense, with all present and future laws,
ordinances, orders, rules, regulations or requirements of all federal, state and
municipal governments and appropriate departments, commissions, boards and
officers thereof (collectively, "Governmental Requirements") relating to (a) all
or any part of the Demised Premises, and (b) to the use or manner of use of the
Demised Premises and the Building Common Area. Tenant shall also observe and
comply with the requirements of all policies of public liability, fire and
other policies of insurance at any time in force with respect to the Demised
Premises. Without limiting the foregoing, if as a result of one or more
Governmental Requirements it is necessary, from time to time during the Term, to
perform an alteration or modification of the Demised Premises (a "Code
Modification") which is made necessary as a result of the specific use being
made by Tenant of the Demised Premises, then such Code Modification shall be the
sole and exclusive responsibility of Tenant in all respects; any such Code
Modification shall be promptly performed by Tenant at its expense in accordance
with the applicable Governmental Requirement and with Section 18 hereof. If as a
result of one or more Governmental Requirements it is necessary from time to
time during the Term to perform a Code Modification which (i) would be
characterized as a capital expenditure under generally accepted accounting
principles and (ii) is not made necessary as a result of the specific use being
made by Tenant of the Demised Premises (as distinguished from an alteration or
modification which would be required to be made by the owner of any warehouse-
office building comparable to the Building irrespective of the use thereof by
any particular occupant), then (a) Landlord shall have the obligation to perform
the Code Modification at its expense, (b) the cost of such Code Modification
shall be amortized on a straight-line basis over the useful life of the item in
question, as reasonably determined by Landlord, and (c) Tenant shall be
obligated to pay (as Additional Rent, payable in the same manner and upon the
same terms and conditions as the Base Rent reserved hereunder) for the portion
of such amortized costs attributable to the remainder of the Term, including any
extensions thereof. Tenant shall promptly send Landlord a copy of any written
notice received by Tenant requiring a Code Modification.
9.
<PAGE>
16. ENVIRONMENTAL MATTERS.
(a) For purposes of this Lease:
(I) "Contamination" as used herein means the presence of or
release of Hazardous Substances (as hereinafter defined) into any environmental
media from, upon, within, below, into or on any portion of the Demised Premises,
the Building, the Building Common Area or the Project so as to require
remediation, cleanup or investigation under any applicable Environmental Law (as
hereinafter defined).
(II) "Environmental Laws" as used herein means all federal,
state, and local laws, regulations, orders, permits, ordinances or other
requirements, which exist now or as may exist hereafter, concerning protection
of human health, safety and the environment, all as may be amended from time to
time.
(III) "Hazardous Substances" as used herein means any hazardous
or toxic substance, material, chemical, pollutant, contaminant or waste as those
terms are defined by any applicable Environmental Laws (including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act 42 U.S.C. 9601 et seq. ("CERCLA") and the Resource Conservation and Recovery
Act, 42 U.S.C. 6901 at seq. ["RCRA"]) and any solid wastes, polychlorinated
biphenyls, urea formaldehyde, asbestos, radioactive materials, radon,
explosives, petroleum products and oil.
(b) Landlord represents that, except as revealed to Tenant in writing
by Landlord, to Landlord's actual knowledge, Landlord has not treated, stored or
disposed of any Hazardous Substances upon or within the Demised Premises, nor,
to Landlord's actual knowledge, has any predecessor owner of the Demised
Premises.
(c) Tenant covenants that all its activities, and the activities of
Tenant's Affiliates (as defined in Section 10(b)), on the Demised Premises, the
Building, or the Project during the Term will be conducted in compliance with
Environmental Laws. Tenant warrants that it is currently in compliance with all
applicable Environmental Laws and that there are no pending or threatened
notices of deficiency, notices of violation, orders, or judicial or
administrative actions involving alleged violations by Tenant of any
Environmental Laws. Tenant, at Tenant's sole cost and expense, shall be
responsible for obtaining all permits or licenses or approvals under
Environmental Laws necessary for Tenant's operation of its business on the
Demised Promises and shall make all notifications and registrations required by
any applicable Environmental Laws. Tenant, at Tenant's sole cost and expense,
shall at all times comply with the terms and conditions of all such permits,
licenses, approvals, notifications and registrations and with any other
applicable Environmental Laws. Tenant warrants that it has obtained all such
permits, licenses or approvals and made all such notifications and registrations
required by any applicable Environmental Laws necessary for Tenant's operation
of its business on the Demised Premises.
(d) Tenant shall not cause or permit any Hazardous Substances to be
brought upon, kept or used in or about the Demised Premises, the Building, or
the Project without the prior written consent of Landlord, which consent shall
not be unreasonably withheld; provided,
10.
<PAGE>
however, that the consent of Landlord shall not be required for the use at the
Demised Premises of cleaning supplies, toner for photocopying machines and other
similar materials, in containers and quantities reasonably necessary for and
consistent with normal and ordinary use by Tenant in the routine operation or
maintenance of Tenant's office equipment or in the routine janitorial service,
cleaning and maintenance for the Demised Premises. For purposes of this Section
16, Landlord shall be deemed to have reasonably withheld consent if Landlord
determines that the presence of such Hazardous Substance within the Demised
Promises could result in a risk of ham to person or property or otherwise
negatively affect the value or marketability of the Building or the Project.
(e) Tenant shall not cause or permit the release of any Hazardous
Substances by Tenant or Tenant's Affiliates into any environmental media such as
air, water or land, or into or on the Demised Premises, the Building or the
Project in any manner that violates any Environmental Laws. If such release
shall occur, Tenant shall (i) take all steps reasonably necessary to contain and
control such release and any associated Contamination, (ii) clean up or
otherwise remedy such release and any associated Contamination to the extent
required by, and take any and all other actions required under, applicable
Environmental Laws and (iii) notify and keep Landlord reasonably informed of
such release and response.
(f) Regardless of any consents granted by Landlord pursuant to Section
16(d) allowing Hazardous Substances upon the Demised Promises, Tenant shall
under no circumstances whatsoever cause or permit (i) any activity on the
Demised Promises which would cause the Demised Premises to become subject to
regulation as a hazardous waste treatment, storage or disposal facility under
RCRA or the regulations promulgated thereunder, (ii) the discharge of Hazardous
Substances into the storm sewer system serving the Project or (iii) the
installation of any underground storage tank or underground piping on or under
the Demised Promises,
(g) Tenant, shall and hereby does indemnify Landlord and hold Landlord
harmless from and against any and all expense, loss, and liability suffered by
Landlord (except to the extent that such expenses, losses, and liability arise
out of Landlord's own negligence or willful act), by reason of the storage,
generation, release, handling, treatment, transportation, disposal, or
arrangement for transportation or disposal, of any Hazardous Substances (whether
accidental, intentional, or negligent) by Tenant or Tenant's Affiliates or by
reason of Tenant's breach of any of the provisions of this Section 16. Such
expenses, losses and liabilities shall include, without limitation, (i) any and
all expenses that Landlord may incur to comply with any Environmental Laws; (ii)
any and all costs that Landlord may incur in studying or remedying any
Contamination at or arising from the Demised Premises, the Building, or the
Project; (iii) any and all costs that Landlord may incur in studying, removing,
disposing or otherwise addressing any Hazardous Substances; (iv) any and all
fines, penalties or other sanctions assessed upon Landlord; and (v) any and all
legal and professional fees and costs incurred by Landlord in connection with
the foregoing. The indemnity contained herein shall survive the expiration or
earlier termination of this Lease,
17. CONSTRUCTION OF DEMISED PREMISES.
(a) Within fifteen (15) days after the Lease Date, Landlord shall prepare,
at Landlord's sole cost and expense, and submit to Tenant a set of plans and
specifications and/or
11.
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construction drawings (collectively, the "Plans and Specifications") based on
the preliminary plans and specifications and/or preliminary floor plans set
forth on Exhibit B attached hereto and incorporated herein, covering all work to
be performed by Landlord in constructing the Improvements (as defined in Section
8(a)(ii)). Tenant shall have five (5) days after receipt of the Plans and
Specifications in which to review and to give to Landlord written notice of its
approval of the Plans and Specifications or its requested changes to the Plans
and Specifications. Tenant shall have no right to request any changes to the
Plans and Specifications which would materially alter either the Demised
Premises or the exterior appearance or basic nature of the Building; as the same
are contemplated by the Preliminary Plans. If Tenant fails to approve or request
changes to the Plans and Specifications by five (5) days after its receipt
thereof, then Tenant shall be deemed to have approved the Plans and
Specifications and the same shall thereupon be final. If Tenant requests any
changes to the Plans and Specifications, Landlord shall make those changes which
are reasonably requested by Tenant and shall within ten (10) days of its receipt
of such request submit the revised portion of the Plans and Specifications to
Tenant. Tenant may not thereafter disapprove the revised portions of the Plans
and Specifications unless Landlord has unreasonably failed to incorporate
reasonable comments of Tenant and, subject to the foregoing, the Plans and
Specifications, as modified by said revisions, shall be deemed to be final upon
the submission of said revisions to Tenant. Tenant shall at all times in its
review of the Plans and Specifications, and of any revisions thereto, act
reasonably and in good faith. After Tenant has approved the Plans and
Specifications or the Plans and Specifications have otherwise been finalized
pursuant to the procedures set forth hereinabove, any subsequent changes to the
Plans and Specifications requested by Tenant shall be at Tenant's sole cost and
expense and subject to Landlord's written approval, which approval shall not be
unreasonably withheld, conditioned or delayed. If after the Plans and
Specifications have been finalized pursuant to the procedures set forth
hereinabove Tenant requests any further changes to the Plans and Specifications
and, as a result thereof, completion of construction of the Improvements is
delayed beyond the Lease Commencement Date, the Term and Tenant's obligation to
pay Base Rent hereunder shall nevertheless begin on the Lease Commencement Date.
(b) Landlord shall use reasonable speed and diligence to substantially
complete the Improvements, at Landlord's sole cost and expense and in compliance
with all applicable laws relating to the construction of the Improvements,
except for any compliance issues related to Tenant's specific use of the Demised
Premises not reflected in the Plans and Specifications, and have the Demised
Premises ready for occupancy on or before the Lease Commencement Date set forth
in Section 1(f). If the Demised Premises are not substantially complete on that
date, such failure to complete shall not in any way affect the obligation of
Tenant hereunder except that the Lease Commencement Date, the Base Rent
Commencement Date, and the Expiration Date shall be postponed one day for each
day substantial completion is delayed until the Demised Premises are
substantially complete, unless the delay is caused by Tenant's failure to
approve the Plans and Specifications as set forth in Section 17(a) or by change
orders requested by Tenant after approval of the Plans and Specifications. No
liability whatsoever shall arise or accrue against Landlord by reason of its
failure to deliver or afford possession of the Demised Promises, and Tenant
hereby releases and discharges Landlord from and of any claims for damage,
loss, or injury of every kind whatsoever as if this Lease were never executed.
For purposes of this Lease, the term "substantial completion" or any
grammatical variation thereof shall mean sufficient completion of construction
of the Demised
12.
<PAGE>
Premises in accordance with the Plans and Specifications, so that Tenant can
lawfully occupy the Demised Premises, as evidenced by the delivery by Landlord
to Tenant of a Certificate of Occupancy or its equivalent (or Temporary
Certificate of Occupancy or its equivalent) for the Demised Premises issued by
the appropriate governmental authority if so required by applicable law.
(c) Upon substantial completion of the Demised Premises, a representative
of Landlord and a representative of Tenant together shall inspect the Demised
Premises and generate a punchlist of defective or uncompleted items relating to
the completion of construction of the Improvements (the "Punchlist"). Landlord
shall, within thirty (30) days after the Punchlist is prepared and agreed upon
by Landlord and Tenant, as extended by Delay (as defined below), complete such
incomplete work and remedy such defective work as is set forth on the Punchlist.
All construction work performed by Landlord shall be deemed approved by Tenant
in all respects except for items of said work which are not completed or do not
conform to the Plans and Specifications and which are included on the Punchlist.
In the event Landlord fails to complete the Punchlist within such thirty (30)
day period, as extended by Delay, Tenant may, at its option, perform the work
necessary to complete the Punchlist (the "Tenant Punchlist Work"). If Tenant
elects to perform the Tenant Punchlist Work, then, (i) prior to commencement of
any work, Tenant shall provide to Landlord a specific description of the Tenant
Punchlist Work and the name of the contractor performing such work, (ii) any
materials used for the Tenant Punchlist Work shall be of equal or better quality
than currently existing in the Building, (iii) Tenant's contractor shall be
adequately insured and of good reputation, and (iv) Landlord shall reimburse
Tenant for the reasonable, actual cost of the Tenant Punchlist Work upon receipt
of adequate bills or other supporting evidence substantiating said cost. For
purposes of this subsection (c), "Delay" shall mean such additional time as is
equal to the time lost by Landlord or Landlord's contractors or Suppliers in
connection with the performance of Landlord's work and/or the construction of
the Demised Premises and related improvements due to strikes or other labor
troubles, governmental restrictions and limitations, war or other national
emergency, non-availability of materials or supplies, delay in transportation,
accidents, floods, fire, damage or other casualties, weather or other
conditions, acts or omissions of Tenant, or delays by utility companies in
bringing utility lines to the Demised Premises.
(d) Upon substantial completion of the Demised Premises and the creation of
the Punchlist, Tenant shall execute and deliver to Landlord a letter of
acceptance in which Tenant (i) accepts the Demised Premises subject only to
Landlord's completion of the items listed on the Punchlist and (ii) confirms
that the Lease Commencement Date, the Base Rent Commencement Date and the
Expiration Date remains as set forth in Section 1, or if revised pursuant to the
terms hereof, setting forth such dates as so revised.
(e) Landlord hereby warrants to Tenant that the materials and equipment
furnished by Landlord's contractors in the completion of the Improvements will
be of good quality and new, that during the one (1) year period following the
Lease Commencement Date, such materials and equipment and the work of such
contractors shall be free from defects not inherent in the quality required or
permitted hereunder, and that such work will conform to the Plans and
Specifications. This warranty shall exclude damages or defects caused by Tenant
or Tenant's Affiliates, improper or insufficient maintenance, improper
operation, or normal wear and tear under normal usage.
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18. TENANT ALTERATIONS AND ADDITIONS.
(a) Tenant shall not make or permit to be made any alterations,
improvements, or additions to the Demised Premises (a "Tenant's Change"),
without first obtaining on each occasion Landlord's prior written consent (which
consent Landlord agrees not to unreasonably withhold) and Lender's prior written
consent (if such consent is required). As part of its approval process, Landlord
may require that Tenant submit plans and specifications to Landlord, for
Landlord's approval or disapproval, which approval shall not be unreasonably
withheld. All Tenant's Changes shall be performed in accordance with all legal
requirements applicable thereto and in a good and workmanlike manner with first-
class materials. Tenant shall maintain insurance reasonably satisfactory to
Landlord during the construction of all Tenant's Changes. If Landlord at the
time of giving its approval to any Tenant's Change notifies Tenant in writing
that approval is conditioned upon restoration, then Tenant shall, at its sale
cost and expense and upon the termination or expiration of this Lease, remove
the same and restore the Demised Premises to its condition prior to such
Tenant's Change. No Tenant's Change shall be structural in nature or impair the
structural strength of the Building or reduce its value. Tenant shall pay the
full cost of any Tenant's Change and shall give Landlord such reasonable
security as may be requested by Landlord to insure payment of such cost. Except
as otherwise provided herein and in Section 12, all Tenant's Changes and all
repairs and all other property attached to or installed on the Demised Premises
by or on behalf of Tenant shall immediately upon completion or installation
thereof be and become part of the Demised Premises and the property of Landlord
without payment therefor by Landlord and shall be surrendered to Landlord upon
the expiration or earlier termination of this Lease.
(b) To the extent permitted by law, all of Tenant's contracts and
subcontracts for such Tenant's Changes shall provide that no lien shall attach
to or be claimed against the Demised Premises or any interest therein other than
Tenant's leasehold interest in the Demised Premises, and that all subcontracts
let thereunder shall contain the same provision. Whether or not Tenant furnishes
the foregoing, Tenant agrees to hold Landlord harmless against all liens, claims
and liabilities of every kind, nature and description which my arise out of or
in any way be connected with such work. Tenant shall not permit the Demised
Premises to become subject to any mechanics', laborers' or materialmen's lien on
account of labor, material or services furnished to Tenant or claimed to have
been furnished to Tenant in connection with work of any character performed or
claimed to have been performed for the Demised Premises by, or at the direction
or sufferance of Tenant and if any such liens are filed against the Demised
Premises, Tenant shall promptly discharge the same, provided, however that
Tenant shall have the right to contest, in good faith and with reasonable
diligence, the validity of any such lien or claimed lien if Tenant shall give to
Landlord, within fifteen days after demand, such security as may be reasonably
satisfactory to Landlord to assure payment thereof and to prevent any sale,
foreclosure, or forfeiture of Landlord's interest in the Demised Premises by
reason of non-payment thereof; provided further that on final determination of
the lien or claim for lien, Tenant shall immediately pay any judgment rendered,
with all proper costs and charges, and shall have the lien released and any
judgment satisfied. If Tenant fails to post such security or does not diligently
contest such lien, Landlord may, without investigation of the validity of the
lien claim discharge such lien and Tenant shall reimburse Landlord upon demand
for all costs and expenses incurred in connection therewith, which expenses
shall include any attorneys' fees, paralegals' fees and any and all costs
associated therewith, including litigation through all trial and appellate
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levels and any costs in posting bond to effect a discharge or release of the
lien. Nothing contained in this Lease shall be construed as a consent on the
part of Landlord to subject the Demised Premises to liability under any lien law
now or hereafter existing of the state in which the Demised Premises are
located.
19. SERVICES BY LANDLORD. Landlord shall be responsible for providing for
maintenance of the Building Common Area, and, except as required by Section
10(b) hereof, Landlord shall be responsible for no other services whatsoever.
Tenant, by payment of Tenant's share of the Operating Expenses, shall pay
Tenant's pro rata share of the expenses incurred by Landlord hereunder.
20. FIRE AND OTHER. In the event the Demised Premises are damaged by fire
or other casualty insured by Landlord, Landlord agrees to promptly restore and
repair the Demised Premises at Landlord's expense, including the Improvements to
be insured by Tenant but only to the extent Landlord receives insurance proceeds
therefor, including the proceeds from the insurance required to be carried by
Tenant on the Improvements. Notwithstanding the foregoing, in the event that
the Demised Premises are (i) in the reasonable opinion of Landlord, so destroyed
that they cannot be repaired or rebuilt within one hundred eighty (180) days
after the date of such damage; or (ii) destroyed by a casualty which is not
covered by Landlord's insurance, or if such casualty is covered by Landlord's
insurance but Lender or other party entitled to insurance proceeds fails to make
such proceeds available to Landlord in an amount sufficient for restoration of
the Demised Premises, then Landlord shall give written notice to Tenant of such
determination (the "Determination Notice") within sixty (60) days of such
casualty. Either Landlord or Tenant may terminate and cancel this Lease
effective as of the date of such casualty by giving written notice to the other
party within thirty (30) days after Tenant's receipt of the Determination
Notice. Upon the giving of such termination notice, all obligations hereunder
with respect to periods from and after the effective date of termination shall
thereupon cease and terminate. If no such termination notice is given, Landlord
shall, to the extent of the available insurance proceeds, make such repair or
restoration of the Demised Premises to the approximate condition existing prior
to such casualty, promptly and in such manner as not to unreasonably interfere
with Tenant's use and occupancy of the Demised Premises (if Tenant is still
occupying the Demised Premises). Base Rent and Additional Rent shall
proportionately abate during the time that the Demised Premises or any part
thereof are unusable by reason of any such damage thereto.
21. CONDEMNATION.
(a) If all of the Demised Premises is taken or condemned for a public
or quasi-public use, or if a material portion of the Demised Premises is taken
or condemned for a public or quasi-public use and the remaining portion thereof
is not usable by Tenant in the reasonable opinion of Landlord, this Lease shall
terminate as of the earlier of the date title to the condemned real estate vests
in the condemnor or the date on which Tenant is deprived of possession of the
Demised Premises. In such event, the Base Rent herein reserved and all
Additional Rent and other sums payable hereunder shall be apportioned and paid
in full by Tenant to Landlord to that date, all Base Rent, Additional Rent and
other sums payable hereunder prepaid for periods beyond that date shall
forthwith be repaid by Landlord to Tenant, and neither party shall thereafter
have any liability hereunder, except that any obligation or
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liability of either party, actual or contingent, under this Lease which has
accrued on or prior to such termination date shall survive.
(b) If only part of the Demised Premises is taken or condemned for a public
or quasi-public use and this Lease does not terminate pursuant to Section 21
(a), Landlord shall, to the extent of the award it receives, restore the Demised
Premises to a condition and to a size as nearly comparable as reasonably
possible to the condition and size thereof immediately prior to the taking, and
there shall be an equitable adjustment to the Base Rent and Additional Rent
based on the actual loss of use of the Demised Premises suffered by Tenant from
the taking.
(c) Landlord shall be entitled to receive the entire award in any
proceeding with respect to any taking provided for in this Section 21, without
deduction therefrom for any estate vested in Tenant by this Lease, and Tenant
shall receive no part of such award. Nothing herein contained shall be deemed
to prohibit Tenant from making a separate claim, against the condemnor, to the
extent permitted by law, for the value of Tenant's moveable trade fixtures,
machinery and moving expenses, provided that the making of such claim shall not
and does not adversely affect or diminish Landlord's award.
22. TENANT'S DEFAULT.
(a) The occurrence of any one or more of the following events shall
constitute an "Event of Default" of Tenant under this Lease:
(I) if Tenant fails to pay Base Rent or any Additional Rent
hereunder as and when such rent becomes due and such failure shall continue for
more than five (5) days after Landlord gives written notice to Tenant of such
failure;
(II) if Tenant fails to pay Base Rent or any Additional Rent on
time more than three (3) times in any period of twelve (12) months,
notwithstanding that such payments have been made within the applicable cure
period;
(III) if the Demised Premises become vacant, deserted, or
abandoned for more than ten (10) consecutive days or if Tenant fails to take
possession of the Demised Premises on the Lease Commencement Date or promptly
thereafter;
(IV) if Tenant permits to be done anything which creates a lien
upon the Demised Premises and fails to discharge or bond such lien, or post
security with Landlord acceptable to Landlord within thirty (30) days after
receipt by Tenant of written notice thereof;
(V) if Tenant fails to maintain in force all policies of
insurance required by this Lease and such failure shall continue for more than
ten (10) days after Landlord gives Tenant written notice of such failure;
(VI) if any petition is filed by or against Tenant or any
guarantor of this Lease under any present or future section or chapter of the
Bankruptcy Code, or under any similar law or statute of the United States or any
state thereof (which, in the case of an involuntary proceeding, is not
permanently discharged, dismissed, stayed, or vacated, as the case
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may be, within sixty (60) days of commencement), or if any order for relief
shall be entered against Tenant or any guarantor of this Lease in any such
proceedings;
(VII) if Tenant or any guarantor of this Lease becomes insolvent
or makes a transfer in fraud of creditors or makes an assignment for the benefit
of creditors;
(VIII) if a receiver, custodian, or trustee is appointed for the
Demised Premises or for all or substantially all of the assets of Tenant or of
any guarantor of this Lease, which appointment is not vacated within sixty (60)
days following the date of such appointment; or
(IX) if Tenant fails to perform or observe any other term of this
Lease and such failure shall continue for more than thirty (30) days after
Landlord gives Tenant written notice of such failure, or, if such failure cannot
be corrected within such thirty (30) day period, if Tenant does not commence to
correct such default within said thirty (30) day period and thereafter
diligently prosecute the correction of same to completion within a reasonable
time.
(b) Upon the occurrence of any one or more Events of Default, Landlord may,
at Landlord's option, without any demand or notice whatsoever (except as
expressly required in this Section 22):
(I) Terminate this Lease by giving Tenant notice of termination, in
which event this Lease shall expire and terminate on the date specified in such
notice of termination and all rights of Tenant under this Lease and in and to
the Demised Premises shall terminate. Tenant shall remain liable for all
obligations under this Lease arising up to the date of such termination, and
Tenant shall surrender the Demised Premises to Landlord on the date specified in
such notice; or
(II) Terminate this Lease as provided in Section 22(b)(i) hereof and
recover from Tenant all damages Landlord may incur by reason of Tenant's
default, including, without limitation, an amount which, at the date of such
termination, is calculated as follows: (1) the value of the excess, if any, of
(A) the Base Rent, Additional Rent and all other sums which would have been
payable hereunder by Tenant for the period commencing with the day following the
date of such termination and ending with the Expiration Date had this Lease not
been terminated (the "Remaining Term"), over (B) the aggregate reasonable rental
value of the Demised Premises for the Remaining Term (which excess if any shall
be discounted to present value at the "Treasury Yield" as defined below for the
Remaining Term); plus (2) the costs of recovering possession of the Demised
Premises and all other expenses incurred by Landlord due to Tenant's default,
including, without limitation, reasonable attorney's fees; plus (3) the unpaid
Base Rent and Additional Rent earned as of the date of termination plus any
interest and late fees due hereunder, plus other sums of money and damages owing
on the date of termination by Tenant to Landlord under this Lease or in
connection with the Demised Premises. The amount as calculated above shall be
deemed immediately due and payable. The payment of the amount calculated in
subparagraph (ii)(1) shall not be deemed a penalty but shall merely constitute
payment of liquidated damages, it being understood and acknowledged by Landlord
and Tenant that actual damages to Landlord are extremely difficult, if not
impossible, to ascertain. "Treasury Yield" shall mean the rate of return in
percent per annum of Treasury Constant
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Maturities for the length of time specified as published in document H.15(519)
(presently published by the Board of Governors of the U.S. Federal Reserve
System titled "Federal Reserve Statistical Release") for the calendar week
immediately preceding the calendar week in which the termination occurs. If the
rate of return of Treasury Constant Maturities for the calendar week in question
is not published on or before the business day preceding the date of the
Treasury Yield in question is to become effective, then the Treasury Yield shall
be based upon the rate of return of Treasury Constant Maturities for the length
of time specified for the most recent calendar week for which such publication
has occurred. If no rate of return for Treasury Constant Maturities is published
for the specific length of time specified, the Treasury Yield for such length of
time shall be the weighted average of the rates of return of Treasury Constant
Maturities most nearly corresponding to the length of the applicable period
specified. If the publishing of the rate of return of Treasury Constant
Maturities is ever discontinued, then the Treasury Yield shall be based upon the
index which is published by the Board of Governors of the U.S. Federal Reserve
System in replacement thereof or, if no such replacement index is published, the
index which, in Landlord's reasonable determination, most nearly corresponds to
the rate of return of Treasury Constant Maturities. In determining the aggregate
reasonable rental value pursuant to subparagraph (ii)(1)(B) above, the parties
hereby agree that, at the time Landlord seeks to enforce this remedy, all
relevant factors should be considered, including, but not limited to, (a) the
length of time remaining in the Term, (b) the then current market conditions in
the general area in which the Building is located, (c) the likelihood of
reletting the Demised Premises for a period of time equal to the remainder of
the Term (d) the net effective rental rates then being obtained by landlords for
similar type space of similar size in similar type buildings in the general area
in which the Building is located, (e) the vacancy levels in the general area in
which the Building is located, (f) current levels of new construction that will
be completed during the remainder of the Term and how this construction will
likely affect vacancy rates and rental rates and (g) inflation; or
(III) Without terminating this Lease, declare immediately due and
payable the sum of the following; (1) the present value (calculated using the
"Treasury Yield") of all Base Rent and Additional Rent due and coming due under
this Lease for the entire Remaining Term (as if by the terms of this Lease they
were payable in advance), plus (2) the cost of recovering and reletting the
Demised Premises and all other expenses incurred by Landlord in connection with
Tenant's default, plus (3) any unpaid Base Rent, Additional Rent and other
rentals, charges, assessments and other sums owing by Tenant to Landlord under
this Lease or in connection with the Demised Premises as of the date this
provision is invoked by Landlord, plus (4) interest on all such amounts from the
date due at the Interest Rate, and Landlord may immediately proceed to distrain,
collect, or bring action for such sum, or may file a proof of claim in any
bankruptcy or insolvency proceedings to enforce payment thereof; provided,
however, that such payment shall not be deemed a penalty or liquidated damages,
but shall merely constitute payment in advance of all Base Rent and Additional
Rent payable hereunder throughout the Term, and provided further, however, that
upon Landlord receiving such payment, Tenant shall be entitled to receive from
Landlord all rents received by Landlord from other assignees, tenants and
subtenants on account of said Demised Premises during the remainder of the Term
(provided that the monies to which Tenant shall so become entitled shall in no
event exceed the entire amount actually paid by Tenant to Landlord pursuant to
this subparagraph (iii)), less all costs, expenses and attorneys' fees of
Landlord incurred but not yet reimbursed by Tenant in connection with recovering
and reletting the Demised Premises; or
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(IV) Without terminating this Lease, in its own name but as agent for
Tenant, enter into and upon and take possession of the Demised Premises or any
part thereof. Any property remaining in the Demised Premises may be removed and
stored in a warehouse or elsewhere at the cost of, and for the account of,
Tenant without Landlord being deemed guilty of trespass or becoming liable for
any loss or damage which may be occasioned thereby unless caused by Landlord's
negligence. Thereafter, Landlord may, but shall not be obligated to, lease to a
third party the Demised Promises or any portion thereof as the agent of Tenant
upon such terms and conditions as Landlord may deem necessary or desirable in
order to relet the Demised Promises. The remainder of any rentals received by
Landlord from such reletting, after the payment of any indebtedness due
hereunder from Tenant to Landlord, and the payment of any costs and expenses of
such reletting, shall be hold by Landlord to the extent of and for application
in payment of future rent owed by Tenant, if any, as the same may become due and
payable hereunder. If such rentals received from such reletting shall at any
time or from time to time be less than sufficient to pay to Landlord the entire
sums then due from Tenant hereunder, Tenant shall pay any such deficiency to
Landlord. Notwithstanding any such reletting without termination, Landlord may
at any time thereafter elect to terminate this Lease for any such previous
default provided same has not been cured; or
(V) Without terminating this Lease, and with or without notice to
Tenant, enter into and upon the Demised Premises and, without being liable for
prosecution or any claim for damages therefor, maintain the Demised Premises and
repair or replace any damage thereto or do anything or make any payment for
which Tenant is responsible hereunder. Tenant shall reimburse Landlord
immediately upon demand for any expenses which Landlord incurs in thus affecting
Tenant's compliance under this Lease and Landlord shall not be liable to Tenant
for any damages with respect thereto; or
(VI) Without liability to Tenant or any other party and without
constituting a constructive or actual eviction, suspend or discontinue
furnishing or rendering to Tenant any property, material, labor, utilities or
other service, wherever Landlord is obligated to furnish or render the same so
long as an Event of Default exists under this Lease; or
(VII) With or without terminating this Lease, allow the Demised
Premises to remain unoccupied and collect rent from Tenant as it comes due; or
(VIII) Pursue such other remedies as are available at law or
equity.
(c) If this Lease shall terminate as a result of or while there exists an
Event of Default hereunder, any funds of Tenant held by Landlord may be applied
by Landlord to any damages payable by Tenant (whether provided for herein or by
law) as a result of such termination or default.
(d) Neither the commencement of any action or proceeding, nor the
settlement thereof, nor entry of judgment thereon shall bar Landlord from
bringing subsequent actions or proceedings from time to time, nor shall the
failure to include in any action or proceeding any sum or sums then due be a bar
to the maintenance of any subsequent actions or proceedings for the recovery of
such sum or sums so omitted.
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(e) No agreement to accept a surrender of the Demised Premises and no
act or omission by Landlord or Landlord's agents during the Term shall
constitute an acceptance or surrender of the Demised Premises unless made in
writing and signed by Landlord. No reentry or taking possession of the Demised
Premises by Landlord shall constitute an election by Landlord to terminate this
Lease unless a written notice of such intention is given to Tenant. No provision
of this Lease shall be deemed to have been waived by either party unless such
waiver is in writing and signed by the party making such waiver. Landlord's
acceptance of Base Rent or Additional Rent in full or in part following an Event
of Default hereunder shall not be construed as a waiver of such Event of
Default. No custom or practice which may grow up between the parties in
connection with the term of this Lease shall be construed to waive or lessen
either party's right to insist upon strict performance of the terms of this
Lease, without a written notice thereof to the other party.
(f) If an Event of Default shall occur, Tenant shall pay to Landlord,
on demand, all expenses incurred by Landlord as a result thereof, including
reasonable attorneys' fees, court costs and expenses actually incurred.
23. LANDLORD'S RIGHT OF ENTRY. Tenant agrees to permit Landlord and the
authorized representatives of Landlord and of Lender to enter upon the Demised
Premises at all reasonable times for the purposes of inspecting the Demised
Premises and Tenant's compliance with this Lease, and making any necessary
repairs thereto; provided that, except in the case of an emergency, Landlord
shall give Tenant reasonable prior notice of Landlord's intended entry upon the
Demised Premises. Nothing herein shall imply any duty upon the part of Landlord
to do any work required of Tenant hereunder, and the performance thereof by
Landlord shall not constitute a waiver of Tenant's default in failing to perform
it. Landlord shall not be liable for inconvenience, annoyance, disturbance or
other damage to Tenant by reason of making such repairs or the performance of
such work in the Demised Premises or on account of bringing materials, supplies
and equipment into or through the Demised Premises during the course thereof,
and the obligations of Tenant under this Lease shall not thereby be affected;
provided, however, that Landlord shall use reasonable efforts not to disturb or
otherwise interfere with Tenant's operations in the Demised Premises in making
such repairs or performing such work. Landlord also shall have the right to
enter the Demised Premises at all reasonable times to exhibit the Demised
Premises to any prospective purchaser, mortgagee or tenant thereof.
24. LENDER'S RIGHTS.
(a) For purposes of this Lease:
(I) "Lender" as used herein means the current holder of a
Mortgage;
(II) "Mortgage" as used herein means any or all mortgages, deeds
to secure debt, deeds of trust or other instruments in the nature thereof which
may now or hereafter affect or encumber Landlord's title to the Demised
Premises, and any amendments, modifications, extensions or renewals thereof.
(b) This Lease and all rights of Tenant hereunder are and shall be
subject and subordinate to the lien and security title of any Mortgage. Tenant
recognizes and acknowledges
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the right of Lender to foreclose or exercise the power of sale against the
Demised Premises under any Mortgage.
(c) Tenant shall, in confirmation of the subordination set forth in
Section 24(b) and notwithstanding the fact that such subordination is self-
operative, and no further instrument or subordination shall be necessary, upon
demand, at any time or times, execute, acknowledge, and deliver to Landlord or
to Lender any and all instruments requested by either of them to evidence such
subordination.
(d) At any time during the Term Lender may, by written notice to
Tenant, make this Lease superior to the lien of its Mortgage. If requested by
Lender, Tenant shall, upon demand at any time or times, execute, acknowledge,
and deliver to Lender, any and all instruments that may be necessary to make
this Lease superior to the lien of any Mortgage.
(e) If Lender (or Lender's nominee, or other purchaser at
foreclosure) shall hereafter succeed to the rights of Landlord under this Lease,
whether through possession or foreclosure action or delivery of a new lease,
Tenant shall, if requested by such successor, attorn to and recognize such
successor as Tenant's landlord under this Lease without change in the terms and
provisions of this Lease and shall promptly execute and deliver any instrument
that may be necessary to evidence such attornment, provided that such successor
shall not be bound by (i) any payment of Base Rent or Additional Rent for more
than one month in advance, except prepayments in the nature of security for the
performance by Tenant of its obligations under this Lease, and then only if such
prepayments have been deposited with and are under the control of such
successor, (ii) any provision of any amendment to the Lease to which Lender has
not consented, (iii) the defaults of any prior landlord under this Lease, or
(iv) any offset rights arising out of the defaults of any prior landlord under
this Lease. Upon such attornment, this Lease shall continue in full force and
effect as a direct lease between each successor landlord and Tenant, subject to
all of the terms, covenants and conditions of this Lease.
(f) In the event there is a Mortgage at any time during the Term,
Landlord shall use reasonable efforts to cause the Lender to enter into a
subordination, nondisturbance and attornment agreement with Tenant reasonably
satisfactory to Tenant and consistent with this Section 24.
25. ESTOPPEL CERTIFICATE. Landlord and Tenant agree, at any time, and
from time to time, within fifteen (15) days after written request of the other,
to execute, acknowledge and deliver a statement in writing in recordable form to
the requesting party and/or its designee certifying that: (i) this Lease is
unmodified and in full force and effect (or, if there have been modifications,
that the same is in full force and effect, as modified), (ii) the dates to which
Base Rent, Additional Rent and other charges have been paid, (iii) whether or
not, to the best of its knowledge, there exists any failure by the requesting
party to perform any term, covenant or condition contained in this Lease, and,
if so, specifying each such failure, (iv) (if such be the case) Tenant has
unconditionally accepted the Demised Premises and is conducting its business
therein, and (v) and as to such additional matters as may be requested, it being
intended that any such statement delivered pursuant hereto may be relied upon by
the requesting party and by any purchaser of title to the Demised Premises or by
any mortgagee or any assignee thereof or any
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party to any sale-leaseback of the Demised Premises, or the landlord under a
ground lease affecting the Demised Premises.
26. LANDLORD LIABILITY. No owner of the Demised Premises, whether or not
named herein, shall have liability hereunder after it ceases to hold title to
the Demised Premises. Neither Landlord nor any officer, director, shareholder,
partner or principal of Landlord, whether disclosed or undisclosed, shall be
under any personal liability with respect to any of the provisions of this
Lease. In the event Landlord is in breach or default with respect to Landlord's
obligations or otherwise under this Lease, Tenant shall look solely to the
equity of Landlord in the Building for the satisfaction of Tenant's remedies. It
is expressly understood and agreed that Landlord's liability under the terms,
covenants, conditions, warranties and obligations of this Lease shall in no
event exceed the loss of Landlord's equity interest in the Building.
27. NOTICES. Any notice required or permitted to be given or served by
either party to this Lease shall be deemed given when made in writing, and
either (i) personally delivered, (ii) deposited with the United States Postal
Service, postage prepaid, by registered or certified mail, return receipt
requested, or (iii) delivered by licensed overnight delivery service providing
proof of delivery, properly addressed to the address set forth in Section 1(m)
(as the same may be changed by giving written notice of the aforesaid in
accordance with this Section 27). If any notice mailed is properly addressed
with appropriate postage but returned for any reason, such notice shall be
deemed to be effective notice and to be given on the date of mailing; provided,
however, that the party that mailed such returned notice shall be obligated to
telephone the intended recipient and inform such intended recipient that such
notice was delivered and returned.
28. BROKERS. Tenant represents and warrants to Landlord that, except for
those parties set forth in Section 1(o) (the "Brokers"), Tenant has not engaged
or had any conversations or negotiations with any broker, finder or other third
party concerning the leasing of the Demised Premises to Tenant who would be
entitled to any commission or fee based on the execution of this Lease. Tenant
hereby further represents and warrants to Landlord that Tenant is not receiving
and is not entitled to receive any rebate, payment or other remuneration, either
directly or indirectly, from the Brokers, and that it is not otherwise sharing
in or entitled to share in any commission or fee paid to the Brokers by Landlord
or any other party in connection with the execution of this Lease, either
directly or indirectly. Tenant hereby indemnifies Landlord against and from any
claims for any brokerage commissions (except those payable to the Brokers, all
of which are payable by Landlord pursuant to a separate agreement) and all
costs, expenses and liabilities in connection therewith, including, without
limitation, reasonable attorneys' fan and expenses, for any breach of the
foregoing. The foregoing indemnification shall survive the termination of this
Lease for any reason
29. ASSIGNMENT AND SUBLEASING.
(a) Tenant may not assign, mortgage, pledge, encumber or otherwise
transfer this Lease, or any interest hereunder, or sublet the Demised Premises,
in whole or in part, without on each occasion first obtaining the prior express
written consent of Landlord, which consent Landlord shall not unreasonably
withhold. Any change in control of Tenant resulting from a merger,
consolidation, stock transfer or asset sale shall be considered an assignment or
22.
<PAGE>
transfer which requires Landlord's prior written consent. For purposes of this
Section 29, by way of example and not limitation, Landlord shall be deemed to
have reasonably withheld consent if Landlord determines (i) that the prospective
assignee or subtenant is not of a financial strength similar to Tenant as of the
Lease Date, (ii) that the prospective assignee or subtenant has a poor business
reputation, (iii) that the proposed use of the Demised Premises by such
prospective assignee or subtenant (including, without limitation, a use
involving the use or handling of Hazardous Substances) will negatively affect
the value or marketability of the Building or the Project or (iv) that the
prospective assignee or subtenant is a current tenant in the Project or is a
bona-fide third-party prospective tenant.
(b) If Tenant desires to assign this Lease or sublet the Demised Promises
or any part thereof, Tenant shall give Landlord written notice no later than
thirty (30) days in advance of the proposed effective date of any proposed
assignment or sublease, specifying (i) the name and business of the proposed
assignee: or sublessee, (ii) the amount and location of the space within the
Demised Premises proposed to be subleased, (iii) the proposed effective date and
duration of the assignment or subletting and (iv) the proposed rent or
consideration to be paid to Tenant by such assignee or sublessee. Tenant shall
promptly supply Landlord with financial statements and other information as
Landlord may reasonably request to evaluate the proposed assignment or sublease.
Landlord shall have a period of thirty (30) days following receipt of such
notice and other information requested by Landlord within which to notify Tenant
in writing that Landlord elects: (i) to terminate this Lease as to the space so
affected as of the proposed effective date set forth in Tenant's notice, in
which event Tenant shall be relieved of all further obligations hereunder as to
such space, except for obligations under Sections 11 and 28 and all other
provisions of this Lease which expressly survive the termination hereof; or (ii)
to permit Tenant to assign or sublet such space; provided, however, that, if the
rent rate agreed upon between Tenant and its proposed subtenant is greater than
the rent rate that Tenant must pay Landlord hereunder for that portion of the
Demised Premises, or if any consideration shall be promised to or received by
Tenant in connection with such proposed assignment or sublease (in addition to
rent), then ten percent (10%) of such excess with such proposed assignment or
sublease (in addition to rent). than ten percent (10%) of such excess rent and
other consideration (after payment of brokerage commissions, attorneys' fees and
other disbursements reasonably incurred by Tenant for such assignment and
subletting if acceptable evidence of such disbursements is delivered to
Landlord) shall be considered Additional Rent owed by Tenant to Landlord, and
shall be paid by Tenant to Landlord, in the case of excess rent, in the same
manner that Tenant pays Base Rent and, in the case of any other consideration,
within ten (10) business days after receipt thereof by Tenant; or (iii) to
refuse, in Landlord's reasonable discretion (taking into account all relevant
factors including, without limitation, the factors set forth in the Section
29(a) (above), to consent to Tenant's assignment or subleasing of such space and
to continue this Lease in full force and effect as to the entire Demised
Premises. If Landlord should fail to notify Tenant in writing of such election
within the aforesaid thirty (30) day period, Landlord shall be deemed to have
elected option (iii) above. Tenant agrees to reimburse Landlord for reasonable
legal fees and any other reasonable costs incurred by Landlord in connection
with any requested assignment or subletting, up to a maximum of $1,000.00, and
such payments shall not be deducted from the Additional Rent owed to Landlord
pursuant to subsection (ii) above. Tenant shall deliver to Landlord copies of
all documents executed in connection with any permitted assignment or
subletting, which documents shall be in form and substance reasonably
23.
<PAGE>
satisfactory to Landlord and which shall require such assignee to assume
performance of all terms of this Lease on Tenant's part to be performed.
(c) No acceptance by Landlord of any rent or any other sum of money
from any assignee, sublessee or other category of transferee shall be deemed to
constitute Landlord's consent to any assignment, sublease, or transfer.
Permitted subtenants or assignees shall become liable directly to Landlord for
all obligations of Tenant hereunder, without, however, relieving Tenant of any
of its liability hereunder. No such assignment, subletting, occupancy or
collection shall be deemed the acceptance of the assignee, tenant or occupant,
as Tenant, or a release of Tenant from the further performance by Tenant of
Tenant's obligations under this Lease. Any assignment or sublease consented to
by Landlord shall not relieve Tenant (or its assignee) from obtaining Landlord's
consent to any subsequent assignment or sublease.
30. TERMINATION OR EXPIRATION.
(a) No termination of this Lease prior to the normal ending thereof,
by lapse of time or otherwise, shall affect Landlord's right to collect rent for
the period prior to termination thereof.
(b) At the expiration or earlier termination of the Term of this
Lease, Tenant shall surrender the Demised Premises and all improvements,
alterations and additions thereto, and keys therefor to Landlord, clean and
neat, and in the same condition as at the Lease Commencement Date, excepting
normal wear and tear, condemnation and casualty other than that required to be
insured against by Tenant hereunder.
(c) If Tenant remains in possession of the Demised Promises after
expiration of the Term, with or without Landlord's acquiescence and without any
express agreement of the parties, Tenant shall be a tenant-at-sufferance at the
greater of (i) one hundred twenty-five percent (125%) of the then current fair
market base rental value of the Demised Premises or (ii) one hundred twenty-five
percent (125%) of the Base Rent in effect at the end of the Term. Tenant shall
also continue to pay all other Additional Rent due hereunder, and there shall be
no renewal of this Lease by operation of law. In addition to the foregoing,
Tenant shall be liable for all damages, direct and consequential, incurred by
Landlord as a result of such holdover. No receipt of money by Landlord from
Tenant after the termination of this Lease or Tenant's right of possession of
the Demised Premises shall reinstate, continue or extend the Tenant or Tenant's
right of possession.
31. Intentionally Omitted.
32. LATE PAYMENTS. In the event any installment of rent, inclusive of
Base Rent, or Additional Rent or other sums due hereunder, if any, is not paid
(i) within five (5) days after Tenant's receipt of written notice of such
failure to pay on the first occasion during any twelve (12) month period, or
(ii) as and when due with respect to any subsequent late payments in any twelve
(12) month period, Tenant shall pay an administrative fee equal to five percent
(5%) of such past due amount, plus interest on the amount past due at the lesser
of (i) the maximum interest rate allowed by law or (ii) a rate of fifteen
percent (15%) per annum (the "Interest Rate") to defray the additional expenses
incurred by Landlord in processing such payment.
24.
<PAGE>
33. RULES AND REGULATIONS. Tenant agrees to abide by the rules and
regulations set forth on Exhibit D attached hereto, as well as other rules and
regulations reasonably promulgated by Landlord from time to time, so long as
such rules and regulations are uniformly enforced against all tenants of
Landlord in the Building.
34. QUIET ENJOYMENT. So long as Tenant has not committed an Event of
Default hereunder, Landlord agrees that Tenant shall have the right to quietly
use and enjoy the Demised Premises for the Term.
35. MISCELLANEOUS.
(a) The parties hereto hereby covenant and agree that Landlord shall
receive the Base Rent, Additional Rent and all other sums payable by Tenant
hereinabove provided as net income from the Demised Premises, without any
abatement (except as set forth in Section 20 and Section 21), reduction, set-
off, counterclaim, defense or deduction whatsoever.
(b) If any clause or provision of this Lease is determined to be
illegal, invalid or unenforceable under present or future laws effective during
the Term, then and in that event, it is the intention of the parties hereto that
the remainder of this Lease shall not be affected thereby, and that in lieu of
such illegal, invalid or unenforceable clause or provision there shall be
substituted a clause or provision as similar in terms to such illegal, invalid
or unenforceable clause or provision as may be possible and be legal, valid and
enforceable.
(c) All rights, powers, and privileges conferred hereunder upon the
parties hereto shall be cumulative, but not restrictive to those given by law.
(d) TIME IS OF THE ESSENCE OF THIS LEASE.
(e) No failure of Landlord or Tenant to exercise any power given
Landlord or Tenant hereunder or to insist upon strict compliance by Landlord or
Tenant with its obligations hereunder, and no custom or practice of the parties
at variance with the terms hereof shall constitute a waiver of Landlord's or
Tenant's rights to demand exact compliance with the terms hereof.
(f) This Lease contains the entire agreement of the parties hereto as
to the subject matter of this Lease and no representations, inducements,
promises or agreements, oral or otherwise, between the parties not embodied
herein shall be of any force and effect. The masculine (or neuter) pronoun,
singular number shall include the masculine, feminine and neuter gender and the
singular and plural number.
(g) This contract shall create the relationship of landlord and
tenant between Landlord and Tenant; no estate shall pass out of Landlord; Tenant
has a usufruct, not subject to levy and sale, and not assignable by Tenant
except as expressly set forth herein.
(h) Under no circumstances shall Tenant have the right to record this
Lease or a memorandum thereof.
25.
<PAGE>
(i) The captions of this Lease are for convenience only and are not a
part of this Lease, and do not in any way define, limit, describe or amplify the
terms or provisions of this Lease or the scope or intent thereof.
(j) This Lease may be executed in multiple counterparts, each of
which shall constitute an original, but all of which taken together shall
constitute one and the same agreement.
(k) This Lease shall be interpreted under the laws of the State where
the Demised Premises are located.
(l) The parties acknowledge that this Lease is the result of
negotiations between the parties, and in construing any ambiguity hereunder no
presumption shall be made in favor of either party. No inference shall be made
from any item which has been stricken from this Lease other than the deletion of
such item.
36. SPECIAL STIPULATIONS. The Special Stipulations, if any, attached
hereto as Exhibit C, are incorporated herein and made a part hereof, and to the
extent of any conflict between the foregoing provisions and the Special
Stipulations, the Special Stipulations shall govern and control.
37. LEASE DATE. For purposes of this Lease, the term "Lease Date" shall
mean the later date upon which this Lease is signed by Landlord and Tenant.
38. AUTHORITY. If Tenant is not a natural person, Tenant shall cause its
corporate secretary or general partner, as applicable, to execute the
certificate attached hereto as Exhibit E. Tenant is authorized by all required
corporate or partnership action to enter into this Lease and the individual(s)
signing this Lease on behalf of Tenant are each authorized to bind Tenant to its
terms.
39. NO OFFER UNTIL EXECUTED. The submission of this Lease to Tenant for
examination or consideration does not constitute an offer to lease the Demised
Premises and this Lease shall become effective, if at all, only upon the
execution and delivery thereof by Landlord and Tenant.
[The remainder of this page is intentionally left blank.]
26.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands under
seals, the day and year first above written.
Date: 3/1/99 LANDLORD:
----------------------------
INDUSTRIAL DEVELOPMENTS INTERNATIONAL
(GEORGIA), L.P., a Georgia limited
partnership
By: IDI (Georgia), Inc., a Georgia
corporation, its sole general partner
By: /s/ Timothy J. Gunter
----------------------------------
Name: Timothy J. Gunter
-------------------------
Title: Secretary
------------------------
Attest: /s/ Gregory J. Ryan
------------------------------
Name: Gregory J. Ryan
-------------------------
Title: Assistant Secretary
------------------------
[CORPORATE SEAL]
TENANT:
Date: 2/19/99 BCS TECHNOLOGIES, INC., a
----------------------------
Delaware corporation
By: /s/ David Frederick
----------------------------------
Name:David Frederick
-------------------------
Title: President
------------------------
Attest: /s/ Kevin A. Kormondy
------------------------------
Name: Kevin A. Kormondy
-------------------------
Title: Vice President
------------------------
[CORPORATE SEAL]
27
<PAGE>
ATTESTATION
LANDLORD:
STATE OF GEORGIA
COUNTY OF FULTON
BEFORE ME, a Notary Public in and for said County, personally appeared
Timothy J. Gunter and Greg J. Ryan known to me to be the person(s) who, as
Secretary and Assistant Secretary respectively, of IDI (Georgia), Inc., a
Georgia corporation, the corporation which executed the foregoing instrument in
its capacity as general partner of Landlord, signed the same, and acknowledged
to me that they did so sign said instrument in the name and upon behalf of said
corporation, in its capacity as general partner of Landlord, that the same is
their free act and deed and they were duly authorized thereunto by the
corporation and the partnership.
IN TESTIMONY WHEREOF, I have hereunto subscribed my name, and affixed my
official seal, this 1st day of March, 1999.
/s/ Charolotte Robinson
-----------------------------------
Notary Public
My Commission Expires: 10/06/01
TENANT
STATE OF COLORADO
COUNTY OF ARAPAHOE
BEFORE ME, a Notary Public in and for said County, personally appeared
David Frederick and Kevin Kormondy known to me to be the person(s)
who, as President and Vice President/Secretary, respectively, of BCS
Technologies, Inc., the corporation which executed the foregoing instrument in
its capacity as Tenant, signed the, am, and acknowledged to am that they did so
sip said instrument in the name and upon behalf of said corporation as officers
of said corporation, that the same is their free act and deed as such officers,
respectively, and they were duly authorized thereunto by its board of directors,
and that the sag affixed to said instrument is the corporate seal of said
corporation.
IN TESTIMONY WHEREOF, I have hereunto subscribed my name, and affixed my
official seal, this 19/th/ day of February, 1999.
/s/ Sheri L. Hoopingauer
----------------------------------
Notary Public
My Commission Expires: 7/19/2000
28.
<PAGE>
EXHIBIT A
[DIAGRAM]
A-1
<PAGE>
EXHIBIT "B"
TENANT IMPROVEMIENTS
BCS TECHNOLOGIES
Building: 4105 Royal Drive
Kennesaw, Georgia
Tenant Square Footage: 24,648 SF
Office Square Footage: + 10,732 SF, as set forth on enclosed
_
spaced plan.
Warehouse Square Footage: + 13,916 SF
_
Car Parking: + 29 spaces (additional spaces can be
_
added in truck court area)
Ceiling Height: 24'
Electrical: 600 amp, 277/480 volt, 3 phase
Sprinkler System: ESFR
Column Spacing: 40' x 40' (typical)
OFFICE AREA
Walls: Painted drywall. Walls go to the lay-in
ceiling except the restroom walls which
penetrate the ceiling, and the warehouse
wall which goes to the dock.
Sound Attenuation Blanket (SAB) type of
insulation included at the conference
room and at all front offices.
Windows: 4 - 5' x 9' (approximate) windows included
in the end wall of the building, and 3 - 6'
x 15' (approximate) windows included in the
front wall of the Building (all are bronze
storefront metal and glass, to match shell
storefront, with blinds). See MAA's plan
A2. 1, dated 2/16/99 for location.
Ceiling: 2' X 4' ceiling tile in 1 grid (lay-in type
of ceiling). The entire office ceiling is
at 9' AFF.
B-1
<PAGE>
Doors: All office doors (except storefront doors) are stained solid
core birch, 3' X T.
Doors leading to the warehouse have 6" wide X 30" high glass
windows.
Door hardware is as follows: Restrooms have push/pull
hardware, closers and kick plates. Locksets included at 10
office doors. Remaining doors have standard hardware.
Flooring: Restrooms, Janitor's, file/copy and galley area are
Armstrong Excelon vinyl composition floor tile.
The remaining areas are an upgraded graphics type of carpet,
similar to what BCS currently has. A typical selection is by
Dimesion (brand) say Calypso (style) which is 36 oz direct
glued to slab.
Storefront: Two storefront doors will be provided per the plan. The
storefront is bronze metal with bronze tinted glass. Blinds
are included on the storefront (except the doors).
Lighting: 18 cell parabolic lights are included (See MAA's plan A-2.1,
dated 2/16/99). The lights have traditional switching (i.e.
not dimmable) Exit and emergency lights are provided per
code.
Electrical: The outlets and phone/data boxes are per MAA's first plan A-
2.1 dated 2/16/99. Cubicles supplied by 9 circuits in 3
overhead J-boxes. 33 telephone/data boxes include pull
string only (low voltage wiring by Tenant)
Mechanical: The office is serviced by a total of 35 tons of air
conditioning, with 3 zones. All units are of mounted RTU's,
and it is a full ducted system (ducted returns)
Restrooms have exhaust fans per code.
B-2.
<PAGE>
All parts of the office are covered by semi-recessed, chrome
fire protection heads for light hazard. Surface mounted fire
extinguishers included per code. Special fire protection
system (i.e. halogen) not included.
Plumbing: See MAA's plan A-2.1, dated 2/16/99 for general layout of
restrooms.
Restroom fixtures are by American Standard or equal. Sinks
are drop-in self rimming; toilets and urinals are flush
valve type.
Toilet partitions are floor mounted, metal in manufacturer's
standard colors.
One wall hung handicap accessible electric water cooler
(drinking fountain) is included.
Accessories include surface mounted mirrors, towel
dispensers, and toilet paper dispensers.
Janitor's room includes a sink (floor mounted mop sink or
raised as desired)
Cabinetry: Break room (galley) includes upper and lower cabinets per
plan.
Restrooms have double sink counter per plan.
All cabinetry is laminated.
FF&E: Furniture, fixtures, and equipment (including appliances)
not included.
WAREHOUSE
Walls: Demising wall is a one (1) hour drywall wall, painted.
The warehouse side of the office/warehouse wall and the
perimeter exterior tilt walls are painted.
Windows: 2 - 5' X 9' (approximate) windows. Included in end wall of
building (storefront metal and glass to match shell
storefront). See MAA's
B-3.
<PAGE>
plan A-2.1, dated 2/16/99 for locations.
Skylights not included.
Structural Steel: Structural steel (joist, girders and columns) and exposed
roof deck are field painted white.
Modifications included as required for HVAC equipment.
Modifications not included for tenant supplied equipment.
Flooring: Lapidolith hardener/sealer provided.
Floor joints are not caulked.
Lighting: Lighting provided by 400 watt metal halide fixtures with
acrylic domes (by Lithonia, or equal). The fixtures do not
have lenses or environmentally protected bulbs. Light levels
of 30 FC and 50 FC (each average measured at 36" AFF) per
areas shown on MAA's plan A-2.1, dated 2/16/99
Metal halide fixtures are suspended from joist and are
controlled by breakers in the lighting panel.
Exit, emergency and night lite lighting provided per code.
Dropped task lighting not included.
Electrical: 600 amp, 480v/277v, 3 phase service provided, with the main
panel on the demising wall near the dock wall.
3 vending machine outlets provided on office wall.
Tenant's production and warehouse electrical outlets are
shown on MAA's plan A-2.1, dated 2/16/99, all mounted at 16"
AFF. All warehouse outlets are 110 V (grouped as noted on
plan) except 3 at 208 volt, single phase, 15 Amp (each on
separate circuit).
Mechanical: One 6 ton and four 7.5 ton RTU's provided for heating and
cooling (36 tons total). Units are blow down type without
ducted distribution.
B-4.
<PAGE>
Air piping and compressor not included.
Existing shell fire protection (ESFR) to remain.
Miscellaneous: One dock high 9' X 10' manual door cut into the dock wall
(to match base building).
One 12' X 14' manual high lift drive-in door provided in
base building.
Dock equipment (levelers, locks, lights) not included.
B-5.
<PAGE>
EXHIBIT C
SPECIAL STIPULATIONS
The Special Stipulations set forth herein are hereby incorporated into the
body of the lease to which these Special Stipulations are attached (the
"Lease"), and to the extent of any conflict between these Special Stipulations
and the preceding language, these Special Stipulations shall govern and control.
1. CONSTRUCTION OF DEMISED PREMISES. Notwithstanding the provisions of
Section 17 of this Lease, Tenant shall be responsible for the cost of the
construction of the Improvements (as defined in Section 8(a)(ii) of the Lease)
in an amount equal to $100,000.00 (the "Tenant Construction Amount"). Within
seven (7) days following Tenant's execution of this Lease, Tenant shall pay the
Tenant Construction Amount to Landlord.
2. OPTION TO EXTEND TERM.
(a) Landlord hereby grants to Tenant two (2) consecutive options to
extend the Term for a period of five (5) years each, each such option to be
exercised by Tenant giving written notice of its exercise to Landlord in the
manner provided in this Lease at least one hundred twenty (120) days prior to
(but not more than two hundred ten (210) days prior to) the expiration of the
Term, as it may have been previously extended. No extension option may be
exercised by Tenant if an Event of Default has occurred and is then continuing
or any facts or circumstances then exist which, with the giving of notice or the
passage of time, or both, would constitute an Event of Default either at the
time of exercise of the option or at the time the applicable Tenant would
otherwise have expired if the applicable option had not been exercised.
(b) If Tenant exercises its option to extend the Term, Landlord
shall, within thirty (30) days after the receipt of Tenant's notice of exercise,
notify Tenant in writing of Landlord's reasonable determination of the Base Rent
for the Demised Premises, which amount shall not be less than the Base Rent for
the prior Term (including any space added thereto pursuant to Special
Stipulation 3 or otherwise) for the applicable five (5) year option period,
taking into account all relevant factors for space of this type in the Kennesaw,
Georgia area, Tenant shall have thirty (30) days from its receipt of Landlord
notice to notify Landlord in writing that Tenant does not agree with Landlords
determination of the Base Rent and therefore that Tenant elects to retract its
option to extend the Term, in which case the Term, as it may have been
previously extended, shall expire on its scheduled expiration date and Tenant's
option to extend the Term shall be void and of no further force and effect. If
Tenant does not notify Landlord of such retraction within thirty (30) days of
its receipt of Landlord's notice, Base Rent for the Demised Premises for the
applicable extended term shall be the Base Rent set forth in Landlord's notice
to Tenant.
(c) Except for the Base Rent, which shall be determined as set forth
in subparagraph (b) above, leasing of the Demised Premises by Tenant for the
applicable extended term shall be subject to all of the same terms and
conditions set forth in this Lease, including Tenant's obligation to pay Tenants
share of Operating Expenses as provided in this Lease; provided, however, that
any improvement allowances, rent abatements or other concessions applicable to
the Demised Premises during the initial Term shall not be applicable during any
C-1
<PAGE>
such extended term, nor shall Tenant have any additional extension options
unless expressly provided for in this Lease. Landlord and Tenant shall enter
into an amendment to this Lease to evidence Tenant's exercise of its renewal
option. If this Lease is guaranteed, it shall be a condition of Landlord
granting the renewal that Tenant deliver to Landlord a reaffirmation of the
guaranty in which the guarantor acknowledges Tenant's exercise of its renewal
option and reaffirms that the guaranty is in full force and effect and applies
to said renewal.
3. RIGHT OF FIRST OFFER TO LEASE. So long as the Lease is in full force
and effect and no Event of Default has occurred and is then continuing and no
facts or circumstances then exist which, with the giving of notice or the
passage of time, or both, would constitute an Event of Default, Landlord hereby
grants to Tenant a right of first offer (the "Right of First Offer") to expand
the Demised Premises to include that 7,200 square foot area labeled as the "ROFO
Premises" on Exhibit A attached hereto (the "Offer Space") subject to the terms
and conditions set forth herein.
(a) Tenant's then current financial condition, as revealed by its
most current financial statements (which shall include quarterly and annual
financial statements, including income statements, balance sheets, and cash flow
statements, as required by Landlord), must demonstrate either that Tenant's net
worth is at least equal to its net worth at the time the Lease was signed; or
that Tenant otherwise meets financial criteria acceptable to Landlord.
(b) The term of the Right of First Offer shall commence on the Lease
Commencement Date and shall expire on the one hundred eightieth (180/th/) day
prior to the expiration of the initial Term (the "First Offer Period"), unless
sooner terminated pursuant to the terms hereof.
(c) Subject to the other terms of this Right of First Offer, after
any part of the Offer Space has or will "become available" (as defined herein)
for leasing by Landlord, Landlord shall not, during the term of the Right of
First Offer, lease to another tenant that available portion of the Offer Space
(the "Available Offer Space") without first offering Tenant the right to lease
such Available Offer Space as set forth herein.
(I) Space shall be deemed to "become available" when Landlord
desires to lease all or a portion of the Offer Space.
(II) Notwithstanding subsection c(i) above, Offer Space shall not
be deemed to "become available" if the space is (a) assigned or subleased by the
current tenant of the space; or (b) re-let by the current tenant of the space by
renewal, extension, or renegotiation or (c) leased on a temporary basis for a
period of less than twelve (12) months without any right to extend.
(d) Consistent with subsection (c), Landlord shall not least any such
Available Offer Space to another tenant unless and until Landlord has first
offered the Available Offer Space to Tenant in writing (the "Offer"). The Offer
shall contain (i) a description of the Available Offer Space (which description
shall include the square footage amount and location of such Available Offer
Space) and an attached floor plan that shows the Available Offer Space; (ii) the
date on which Landlord expects the Available Offer Space to become available;
(iii) the
C-2.
<PAGE>
base rent for the Available Offer Space; and (iv) the increase in Tenant
Operating Expense Percentage as defined in Section 1(j) of the Lease. Upon
receipt of the Offer, Tenant shall have the right, for a period of three (3)
calendar days after receipt of the Offer, to exercise the Right of First Offer
by giving Landlord written notice that Tenant desires to lease the Available
Offer Space at the base rent and upon the special terms and conditions as are
contained in the Offer. If the term of the Available Offer Space expires after
the Term of the Lease, the Term of the Lease shall be extended to be coterminous
with the term of the Available Offer Space and the Annual Base Rent per square
foot for the existing Demised Premises during said extension shall be based upon
the greater of (i) the base rent per square foot for the Available Offer Space
or (ii) the Annual Base Rent per square foot of the Demised Premises for the
last year of the Term (including any escalation which would have occurred during
any extension of the Term pursuant to Special Stipulation 2 hereof). If Tenant
has an extension option under this Lease and the Term of this Lease is deemed
extended to be coterminous, with the expiration date set forth in the Offer,
then the applicable extension option shall be deemed exercised for the period of
time required to make the Tenant of this Lease coterminous with the expiration
date of the Offer.
(e) If, within such three (3)-day period, Tenant exercises the Right
of First Offer, then Landlord and Tenant shall amend the Lease to include the
Available Offer Space subject to the same terms and conditions as the Lease, as
modified by the terms and conditions of the Offer. If this Lease is guaranteed
now or at anytime in the future, Tenant simultaneously shall deliver to Landlord
an original, signed, and notarized reaffirmation of each Guarantor's personal
guaranty, in form and substance acceptable to Landlord.
(f) If, within such three (3)-day period, Tenant declines or fails to
exercise the Right of First Offer, Landlord shall then have the right to lease
the Available Offer Space in portions or in its entirety to a third party,
unrelated to and unaffiliated with Landlord, at any time without regard to the
restrictions in this Right of First Offer and on whatever terms and conditions
Landlord may decide in its sole discretion, provided the base rent (as adjusted
to account for any changes in the tenant improvement allowance), additional rent
and any rent concessions are not substantially more favorable to such tenant
than those set forth in the Offer, without again complying with all the
provisions of this Right of First Offer.
(g) If Landlord does lease all or any portion of the Available Offer
Space to such a third party after complying with the terms and conditions of
this Right of First Offer, then the Right of First Offer shall terminate, and
Tenant shall have no further Right of First Offer.
(h) If Landlord desires to lease the Available Offer Space at a base
rent rate substantially less than the base rent rate set forth in the Offer
(provided, that if the base rent rate is at least ninety percent (90%) of the
base rent rate set forth in the Offer, said base rent rate shall be conclusively
deemed to be not substantially less than the base rent set forth in the Offer),
or if Landlord desires to materially alter or modify the special terms and
conditions of the Offer, if any, Landlord shall be required to present the
altered or modified Offer to Tenant pursuant to this Right of First Offer, in
the same manner that the original Offer was submitted to Tenant.
(i) The Right of First Offer is personal to BCS Technologies, Inc.
and shall become null and void upon the occurrence of an assignment of Tenant's
interest in the Lease or a sublet of all or a part of the Demised Premises.
C-3.
<PAGE>
4. OPERATING EXPENSES - CAP ON CONTROLLABLE EXPENSES. In the event that
the amount of Operating Expenses for the Building attributable to all items
other than taxes, utilities, insurance, snow removal and charges assessed
against or attributed to the Building pursuant to any applicable declaration of
protective covenants (Operating Expenses attributable to all such other items
being referred to collectively herein as "Controllable Expenses") in any
calendar year exceeds the amount attributable to Controllable Expenses for the
Building during the immediately preceding calendar year by more than ten percent
(10%) (the "Cap"), then the amount attributable to Controllable Expenses for the
Building, for purposes of determining the amount of Tenant's proportionate share
of Operating Expenses only (as Tenant's proportionate share may have been
adjusted to account for any changes in the size of the Demised Premises due to
expansions or contractions), shall be limited to the amount attributable to
Controllable Expenses for the Building for the immediately preceding calendar
year multiplied by the sum of one hundred percent (100%) and the Cap. If the
Building was complete and operational for only a portion of such immediately
preceding calendar year, then Operating Expenses for the Building shall be
annualized for such calendar year for purposes of applying this Special
Stipulation 4. Any proration of Tenant's share of Operating Expenses for any
partial calendar year during the Term shall be prorated in accordance with the
last sentence of Section 6(a) of the Lease.
5. INSPECTION RIGHTS.
(a) Landlord's books and records pertaining to the calculation of
Operating Expenses for any calendar year within the Term may be inspected by
Tenant (or by an independent certified accountant) at Tenant's expense, at any
reasonable time within sixty (60) days after Tenant's receipt of Landlords
statement for Operating Expenses; provided that Tenant shall give Landlord not
less than fifteen (15) days' prior written notice of any such inspection. If
Landlord's calculation of Tenant's share of Operating Expenses for the inspected
calendar year was incorrect, than Tenant shall be entitled to a credit against
future Base Rent for said overpayment (or a refund of any overpayment if the
Term has expired) or Tenant shall pay to Landlord the amount of any
underpayment, as the case may be. If Tenant's inspection proves that Landlord's
calculation of Tenant's share of Operating Expenses for the inspected calendar
year resulted in an overpayment by more than ten percent (10%) of Tenant's
share, Landlord shall also pay the reasonable fees and expenses of Tenants
independent professionals, if any, conducting said inspection.
(b) All of the information obtained through Tenant's inspection with
respect to financial matters (including, without limitation, costs, expenses,
income) and any other matters pertaining to Landlord, the Demised Premises, the
Building and/or the Project as well as any compromise, settlement, or adjustment
reached between Landlord and Tenant relative to the results of the inspection
shall be held in strict confidence by Tenant and its officers, agents, and
employees, and Tenant shall cause its independent professionals and any of its
officers, agents or employees to be similarly bound. The obligations within
this subsection (b) shall survive the expiration or earlier termination of the
Lease.
6. TENANT MAINTENANCE AND REPAIR.
(a) Notwithstanding the provisions of Section 10(a) of this Lease,
Tenant shall not be required to pay for any repairs to the heating, ventilation
and air conditioning
C-4.
<PAGE>
systems (the "HVAC") to the extent that the cost to Tenant (reduced by any
reimbursements to Tenant related to HVAC warranties or guaranties) of such
repairs exceeds $2,500.00 per year during the initial Term (the "HVAC Cap").
(b) In the event the HVAC Cap does not apply in any given year, the
difference between the amount of the HVAC Cap for that year and the amount
actually spent by Tenant to repair the HVAC during that year shall be carried
forward to the next succeeding year(s) and included as part of the HVAC Cap for
such next succeeding year(s); provided, however, that the HVAC Cap in any given
year during the initial Term shall not exceed $5,000.00.
(c) In the event the HVAC Cap applies in any given year, prior to
Tenant initiating repair that will exceed the HVAC Cap, Tenant shall notify
Landlord, and Landlord shall have the option to complete any and all repairs to
the HVAC, and to pay for any or all of such repairs to the extent the cost of
such repairs exceeds the HVAC Cap. Tenant shall remain obligated to pay for any
or all repairs completed by Landlord to the extent of the HVAC Cap.
(d) The HVAC Cap shall not apply to any repairs required as a result
of Tenant's gross negligence or willful misconduct, or Tenant's failure to
maintain the HVAC in accordance with Section 10 of the Lease.
7. ENVIRONMENTAL MATTERS. Landlord shall indemnify Tenant and hold Tenant
harmless from and against any and all expenses, losses and liabilities actually
offered by Tenant (with the sole exception of any and all consequential damages,
including but not limited to the loss of use of the Demised Premises, lost
profits and loss of business, and those expenses, losses, and liabilities
arising from Tenant's own negligence or willful act) as a result of Landlord's
breach of its representation in Section 16(b). Landlord and Tenant hereby
acknowledge that neither Landlord nor Tenant assumes liability for the acts of
third parties relating to the presence of Hazardous Substances within or under
the Demised Premises.
8. CONSTRUCTION OF DEMISED PREMISES. Notwithstanding the provisions of
Section 17(b) of this Lease, in the event that Landlord is unable to
substantially complete the Demised Premises for occupancy by Tenant on or before
June 1, 1999, as extended by Delay (as defined below), rent shall abate two (2)
days for every day that substantial completion has not occurred after June 1,
1999, but before July 1, 1999. In the event that Landlord is unable to
substantially complete the Demised Premises for occupancy by Tenant on or before
July 1, 1999, as extended by Delay Tenant may, at its option, terminate this
Lease by written notice to landlord given on or before July 1, 1999, as extended
by Delay (provided that substantial completion has not occurred prior to
Landlord's receipt of said termination notice), in which event Landlord shall
return the Tenant Construction Amount to Tenant and thereafter neither Landlord
nor Tenant shall have any further obligations hereunder. For purposes of this
Special Stipulation 8, "Delay" shall mean delays incurred by reason of Tenants
failure to approve the Plans and Specifications as set forth in Section 17(a) of
this Lease or changes requested by Tenant in the Plans and Specifications after
Tenant's approval thereof, and for such additional time as is equal to the time
lost by Landlord or Landlord's contractors or suppliers in connection with the
performance of Landlord's work and/or the construction of the Demised Premises
and related improvements due
C-5.
<PAGE>
to strikes or other labor troubles, governmental restrictions and limitations,
or other national emergency, non-availability of materials or supplies, delay in
transportation, accidents, floods, fire, damage or other casualties, weather or
other conditions, acts or omissions of Tenant, or delays by utility companies in
bringing utility lines to the Demised Premises.
9. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT. Notwithstanding the
provisions of Section 24 of this Lease, this Lease and all rights of Tenant
hereunder are and shall be subject and subordinate to the lien and security
title of any Mortgage created after the Lease Date provided that the holder of
said Mortgage agrees not to disturb Tenant's possession of the Demised Premises
so long as Tenant is not in default hereunder, as evidenced by a subordination,
non-disturbance and attornment agreement signed by said holder which agreement
may include (a) the conditions contained in Section 24(e) of this Lease, (b) a
requirement that said holder be given notice and opportunity to cure a Landlord
default and (c) other provisions customarily required by lenders. Tenant shall
promptly execute such a subordination, non-disturbance and attornment agreement
upon Landlord's request.
10. ASSIGNMENT. Notwithstanding the provisions of Section 29 of this
Lease, Tenant shall be entitled to assign this Lease or sublease the Demised
Promises to an Affiliate, as defined below, without the necessity of obtaining
Landlord's prior written consent, provided that such Affiliate has a tangible
net worth equal to or greater than the tangible not worth of the Tenant as of
the Lease Date. For purposes of this Lease, an "Affiliate" shall mean any firm,
person, corporation, partnership or other entity now or hereafter directly or
indirectly in control of, or controlled by or under control with, Tenant or any
of its principals, or into which or with which Tenant intends to merge or
consolidate, or which agrees to acquire all of, or substantially all of,
Tenant's stock, partnership interest or assets. For purposes of this Lease,
"tangible net worth" shall mean the excess of the value of tangible assets (i.e.
assets excluding those which are intangible such as goodwill, patents and
trademarks) over liabilities calculated in accordance with generally accepted
accounting principles. Tenant shall provide Landlord notice of any intended
assignment or sublease to an Affiliate.
11. LANDLORD DEFAULT. Landlord shall not be in default unless it fails to
perform the obligations required of it by this Lease within thirty (30) days
after written notice from Tenant specifying which obligation Landlord has
failed to perform. Provided, however, that if the nature of the specified
obligation is such that more than thirty (30) days are reasonably required to
complete its cure, then Landlord shall not be in default if it commences to cure
within said thirty (30) day period and thereafter diligently prosecutes the same
to completion. As to Landlord's maintenance and repair obligations hereunder,
if Landlord has not cured or commenced to cure a maintenance or repair default
set forth in said notice within said thirty (30) day period, Tenant, may, at its
option, cure such default. If Tenant elects to cure said default Tenant shall,
prior to commencement of said work, provide to Landlord a specific description
of the work to be performed by Tenant and the name of Tenant's contractor. Any
materials used shall be of equal or better quality than currently exists in the
Building and Tenant's contractor shall be adequately insured and of good
reputation. Landlord shall reimburse Tenant for the reasonable, actual cost of
said cure upon receipt of adequate bills or other supporting evidence
substantiating said cost less any amounts otherwise reimbursable to Tenant under
any insurance policies carried by Tenant.
C-6.
<PAGE>
12. LANDLORD LIABILITY. For purposes of Section 26 of this Lease,
Landlords equity interest in the Building shall be deemed to be no less than
twenty percent (20%) of the fair market value of the Building determined as of
the date on which Tenant initiates the applicable action to enforce its rights
under this Lease.
C-7.
<PAGE>
EXHIBIT D
RULES AND REGULATIONS
These Rules and Regulations have been adopted by Landlord for the mutual benefit
and protection of all the tenants of the Building in order to insure the safety,
care and cleanliness of the Building and the preservation of order therein.
1. The sidewalks shall not be obstructed or used for any purpose other
than ingress and egress. No tenant and no employees of any tenant shall go upon
the roof of the Building without the consent of Landlord.
2. No awnings or other projections shall be attached to the outside walls
of the Building without the consent of Landlord, which consent shall not be
unreasonably withhold.
3. The plumbing fixtures shall not be used for any purpose other than
those for which they were constructed, and no sweepings, rubbish, rags or other
substances, including Hazardous Substances, shall be thrown therein.
4. No tenant shall cause or permit any objectionable or offensive odors
to be emitted from the Demised Premises.
5. The Demised Premises shall not be used for lodging or sleeping or for
any immoral or illegal purposes.
6. No tenant shall make, or permit to be made any unseemly or disturbing
noises, sounds or vibrations or disturb or interfere with tenants of this or
neighboring buildings or premises or those having business with them.
7. Each tenant must, upon the termination of this tenancy, return to the
Landlord all keys of stores, offices, and rooms, either furnished to, or
otherwise procured by, such tenant, and in the event of the loss of any keys so
furnished, such tenant shall pay to the Landlord the cost of replacing the same
or of changing the lock or locks opened by such lost key if Landlord shall deem
it necessary to make such change.
8. Canvassing, soliciting and peddling in the Building and the Project
are prohibited and each tenant shall cooperate to prevent such activity.
9. Landlord will direct electricians as to where and how telephone or
telegraph wires are to be introduced. No boring or cutting for wires or
stringing of wires will be allowed without written consent of Landlord. The
location of telephones, call boxes and other office equipment affixed to the
Demised Premises shall be subject to the approval of Landlord.
10. Parking spaces associated with the Building are intended for the
exclusive use of passenger automobiles. Except for intermittent deliveries, no
vehicles other than passenger automobiles may be parked in a parking space
without the express written permission of Landlord. Trucks and tractor trailers
may only be parked at designated areas of the Building. Trucks and tractor
trailers shall not block access to the Building.
D-1
<PAGE>
11. No tenant shall use any area within the Project for storage purposes
other than the interior of the Demised Premises.
C-2.
<PAGE>
EXHIBIT E
CERTIFICATE OF AUTHORITY
CORPORATION
The undersigned, Secretary of BCS Technologies, Inc., a Delaware
corporation ("Tenant"), hereby certifies as follows to Industrial Developments
International (Georgia), L.P., a Georgia limited Partnership ("Landlord"), in
connection with Tenant's proposed least of promises in Building B, at Northpark
75, Cobb County, Georgia (the "Premises"):
1. Tenant is duly organized, validly existing and in good standing under
the laws of the State of Delaware, and duly qualified to do business in the
State of Georgia.
2. That the following named persons, acting individually, are each
authorized and empowered to negotiate and execute, on behalf of Tenant, a lease
of the Premises and that the signature opposite the name of each individual is
an authentic signature;
David Frederick President /s/ David Federick
- ------------------------ ------------------------ -------------------------
(name) (title) (signature)
________________________ ________________________ ________________________
(name) (title) (signature)
________________________ ________________________ ________________________
(name) (title) (signature)
3. That the foregoing authority was conferred upon the person(s) named
above by the Board of Directors of Tenant at a duly convened meeting held
February 19, 1999.
/s/ Kevin Kormondy
---------------------------------
Secretary
[CORPORATE SEAL]
E-1
<PAGE>
EXHIBIT 10.11
LEASE AGREEMENT
AGREEMENT entered into as of the first (1/st/) day of March, 1999, between
Cortelco Puerto Rico, Inc., hereinafter called the "Landlord", and Cortelco
Systems Puerto Rico, Inc., hereinafter called the "Tenant."
PREAMBLE
Landlord hereby leases to the Tenant and the Tenant hereby hires from the
Landlord certain building space consisting of approximately 19,915 square feet,
identified as the area shaded and marked "Premises" on the attached Exhibit A
(the "Premises") and which are part of the building identified in said Exhibit A
(the "Building"), including ingress and egress to the public roadways as these
are depicted on Exhibit A. The premises consist of approximately 12,275 square
feet of showroom space and approximately 7,640 square feet of office and
administrative space, located at 1550 Ponce de Leon Avenue. The term of this
lease shall be for a period of five (5) years commencing on the first (1/st/)
day of March, 1999, hereinafter called "term commencement date" and expiring on
the thirty-first (31/st/) day of March, 2004.
Provided Tenant is not in default hereunder, it shall have the option to
renew the term of this lease for two (2) consecutive periods of one (1) year
each, as further specified in Article XXIV hereof.
Tenant shall pay to Landlord, without demand and without deduction,
abatement or set-off in advance on or before the 5/th/ day of each month the sum
of $25,308.65 (the "base rent").
Tenant shall have the right to use forty (40) parking spaces in any of
the employees parking lots, and twenty (20) parking spaces in the main building
patio to be assigned at Landlord's discretion.
The parties covenant and agree as follows:
ARTICLE I
PAYMENT OF RENT; SECURITY DEPOSIT
The Tenant shall pay the base rent with respect to the Premises and the
Parking, as specified above, and an additional rent as set forth in Article XVI
below, without any deduction or set-off whatsoever.
1.
<PAGE>
ARTICLE II
PURPOSE
The Premises shall be used and occupied for any legal purpose relating
to Tenant's business.
ARTICLE III
ALTERATIONS; SIGNS
The Tenant shall make no alterations, additions or improvements to the
Premises nor erect any sign on the facade of the Building, without the prior
written consent of the Landlord. All such alterations, additions or
improvements made by or for the Tenant, shall, when made, be the property of the
Landlord and shall remain upon and be surrendered with the Premises as a part
thereof at the expiration or earlier termination of this lease, except that the
Tenant shall have the right to remove any alterations installed by Tenant and
which can be removed without damaging the Premises. Also, Landlord reserves the
right to require the Tenant to remove any such alterations, additions,
improvements or signs including, but without limitation, stairs, stair wells,
floor coverings and other fixtures installed by or at the request of the Tenant,
by giving notice of such election to the Tenant at any time prior to, or not
later than ten (10) days after the expiration or earlier termination of this
lease, in which event the Tenant, at the Tenant's sole cost and expense, shall
remove the items specified on or before such date of expiration or earlier
termination of the term of this lease or five (5) days after the giving of such
notice, whichever shall be the later, and shall promptly reimburse the Landlord
for the cost of restoration of the Premises and of repairing all damage done to
the Premises by such removal.
ARTICLE IV
TENANT'S CARE
The Tenant shall take good care of the Premises and the fixtures
therein and at the expiration or earlier termination of this lease will
surrender the Premises and fixtures in as good condition as reasonable use will
permit, ordinary wear and tear excepted. All injury to the Premises, the
Building or the sanitary, electrical, air conditioning or other systems or
fixtures thereof caused by moving the property of the Tenant in or out of the
Building or resulting from the act or neglect of the Tenant or the employees,
servants, agents, licensees, visitors, assigns or
2.
<PAGE>
undertenant of the Tenant, shall be repaired promptly by and at the expense of
the Tenant in a workmanlike manner, and if the Tenant fails to do such work, the
same may be done by the Landlord, and the cost thereof shall be payable by the
Tenant to the Landlord.
ARTICLE V
ORDINANCES AND VIOLATIONS
The Tenant, at the Tenant's expense, shall promptly execute, fulfill and
comply with all laws, rules, orders, ordinances, regulations and requirements of
any governmental authority claiming jurisdiction over the Premises and all
requirements of any Board of Fire Underwriters, or any similar body, to the
extent the same or any of them affect the Tenant's occupancy of the Premises, or
the business conducted therein.
ARTICLE VI
INSURANCE
1. Tenant will procure and maintain and pay all premiums, fees and
charges for the purpose of procuring and maintaining continuously throughout the
term of this lease: (a)insurance on the Premises and the improvements thereon
against loss or damage by fire or other casualty with endorsements providing
what is commonly known as all risk fire and extended coverage, vandalism and
malicious mischief insurance, in an amount equal to the full replacement cost
thereof, with a deductible of no greater than $5,000; and
(b) general liability insurance with respect to the Premises and the
Parking with a combined single limit of not less than $2,000,000 for any bodily
injury or property damage, with a deductible of no greater than $1,000.00, which
insurance specified in (a) and (b) shall name Landlord as an additional insured,
with insurers satisfactory to Landlord and authorized to do business in Puerto
Rico.
2. If, because of anything done, caused to be done, permitted or omitted
by the Tenant, the premium rate for any kind of insurance affecting the Building
shall be increased, the Tenant shall pay to the Landlord the additional amount
which the Landlord shall be thereby obligated to pay for such insurance, and if
the Landlord shall demand that the Tenant remedy the condition which caused the
increase in the insurance premium rate, the Tenant will remedy such condition
within five (5) days alter such demand. The Tenant shall not do, or cause to be
done,
3.
<PAGE>
or permit on the Premises anything deemed extra hazardous on account of
fire. The policies shall contain a clause that the insurer will not cancel or
change the insurance policies without first giving Landlord thirty (30) days
prior written notice.
ARTICLE VII
INDEMNITY
The Tenant shall indemnify and save harmless the Landlord and the agents,
servants and employees of the Landlord against and from any and all liability,
fines, suits, claims, demands, expenses and actions of any kind or nature
arising by reason of injury to person or property occurring in the Premises, the
Building or the Parking (as the case may be) occasioned in whole or in part by
any act or omission on the part of the Tenant or an employee (whether or not
acting within the scope of employment), servant, agent, licensee, visitor,
assign or undertenant of the Tenant, or by any use or occupancy of the Premises
or any breach, violation or nonperformance of any covenant in this lease on the
part of the Tenant to be observed or performed.
ARTICLE VIII
RIGHT OF LANDLORD TO ENTER PREMISES
The Landlord shall have the right to enter and to grant licenses to others
to enter the Premises at any time (a) to examine the Premises, (b) to make
repairs, replacements and improvements to the Premises or to the Building or
equipment thereof, including the right during the progress of any such work to
keep and store within the Premises all necessary materials, tools and equipment
(but nothing herein shall obligate the Landlord to make any repairs,
replacements or improvements other than as expressly set forth in this lease),
(c) for any purpose which the Landlord may deem necessary for the operation and
maintenance of the Building, or (d) to exhibit the Premises to prospective
purchasers or mortgagees (and during the last twelve (12) months of the term of
this lease, to prospective tenants), and no such entry shall render the Landlord
liable to any claim or cause of action for damages by reason thereof.
4.
<PAGE>
ARTICLE IX
REPAIRS AND ALTERATIONS IN BUILDING
The Landlord reserves the right to make such repairs, changes, alterations,
additions or improvements in or to any portion of the Building and the fixtures
and equipment thereof as it may deem necessary or desirable and, for the purpose
of making the same, to use the street entrances, halls, stairs and elevators of
the Building, provided that there be no unnecessary obstruction of the Tenant's
right of entry to the Premises, and the Tenant shall make no claims for
compensation or damages against the Landlord by reason of inconvenience or
annoyance arising therefrom.
ARTICLE X
UTILITIES
The cost of all electricity (including that for air conditioning) and all
other utilities used by the Tenant in connection with its business on, or
occupancy of, the Premises from 8:00 AM to 5:00 PM Mondays through Fridays
(excluding legal holidays) (hereinafter "Regular Business Hours") shall be for
Landlord's account. The cost of all electricity (including that for air
conditioning) and all other utilities used by the Tenant in connection with its
business on, or occupancy of, the Premises outside Regular Business Hours shall
be for Tenant's account.
ARTICLE XI
MAINTENANCE
All maintenance and cleaning of the Premises, but excluding any structural
repairs to the Building, shall be furnished by and shall be for the account of
Tenant. Landlord shall make any required structural repairs necessary to the
Building at its own expense and Tenant agrees to notify Landlord promptly of the
need for any such repair. The term "structural repairs" shall not be deemed to
include water leaks or filtration affecting the walls or ceiling of the
Premises.
Tenant and Landlord have examined and inspected the Premises and Tenant
hereby accepts the same in its present condition as of the date of the execution
hereof. Tenant acknowledges that neither Landlord nor Landlord's agents have
made any representation or warranty as to the suitability of the Premises for
the conduct of Tenant's business.
5.
<PAGE>
ARTICLE XII
REAL ESTATE TAX INCREASE
A. For the purpose of this Article, the following terms shall have the
following meanings: "lease year" shall mean the twelve-month period commencing
on the term commencement date, and each twelve-month period thereafter; "real
estate taxes" shall mean any and all amounts which become due and payable during
a lease year in respect of taxes and assessments, special or otherwise, imposed
upon the Building and the lot upon which it is located; "tax base" shall mean
the real estate taxes due and payable for the fiscal year from July 1, 1997 to
June 30, 1998. If real estate taxes applicable to any lease year are greater
than the tax base, the Tenant shall pay as additional rent for such lease year a
sum equal to 2.7% of the amount by which real estate taxes applicable to a lease
year are greater than the tax base (hereinafter called "Tenant's tax payment").
In the event real estate taxes applicable to a lease year are greater than the
tax base, the Landlord may give the Tenant, within ninety (90) days after the
end of such lease year, or within ninety (90) days after Landlord is notified of
such tax, notice of Tenant's tax payment for such lease year; provided, however,
that if this lease expires or is terminated during such lease year, Tenant's tax
payment shall be limited to an amount equal to Tenant's tax payment for such
lease year apportioned as of the date of such expiration or termination, and the
Tenant shall make payment of Tenant's tax payment or of the same as apportioned
within thirty (30) days after the giving of such notice, notwithstanding the
fact that this lease has expired or has been terminated prior to the time of the
giving of such notice. In the event the Landlord shall receive any refund as a
result of a reduction in real estate taxes for any lease year after the first
lease year and a Tenant's tax payment for such lease year has been made by the
Tenant, the Landlord shall remit to the Tenant a sum equal to 2.7% of the refund
received by the Landlord for such lease year, after deducting from such refund
all expenses incurred by the Landlord in connection with obtaining the same,
including attorneys' fees. At Landlord's option, any additional rent
attributable to an increase in real estate taxes, or any decrease in rent due to
a decrease in real estate taxes, shall be payable by Tenant, or credited to
Tenant, as the case may be, on a monthly basis allocated evenly over the number
of months in the lease year, or balance of the lease year if such increase or
decrease shall be effective during the middle of a lease year.
B. Tenant shall pay before delinquency all taxes, assessments, license
fees, and other charges which are levied against Tenant's alterations and
fixtures and which become payable
6.
<PAGE>
during the term hereof. If any such alterations or fixtures are assessed with
Landlord's real property, Tenant shall pay Landlord the taxes attributable to
Tenant within thirty (30) days after receipt of a written statement setting
forth the applicable taxes.
C. During the first and last years of the term hereof, all such taxes and
assessments which shall become payable during each of the calendar, fiscal, tax
or assessments years, as applicable, shall be ratably adjusted on a per diem
basis (based on the area that the Premises bears to the Building) between
Landlord and Tenant in accordance with the respective portions of such calendar,
fiscal, tax or assessment year.
ARTICLE XIII
DAMAGE
The Landlord shall not be liable for damage to any property or injury to
any person at any time in the Premises or Building by reason of any action of
the elements or arising from water, wind, rain, smoke, steam or electricity
which may leak into, or issue or flow from any part of the Building. The
Landlord shall not be responsible for any latent defect or change of conditions
in the Premises resulting in damage to the same or to the property or persons
therein unless due to the negligence of the Landlord, its agents, servants or
employees.
ARTICLE XIV
ASSIGNMENT AND SUBLETTING;
LANDLORD'S OPTION TO TERMINATE
1. Neither the Tenant nor the legal representative of the Tenant shall
assign, transfer or mortgage this lease or any interest therein or let or sublet
the Premises or any part thereof or permit the Premises or any part thereof to
be used by others without the prior written consent of the Landlord in each
instance, which consent may be withheld by Landlord at its sole discretion. In
the event such consent be given, the same shall be deemed to relate solely to
the particular assignment, transfer, mortgage, sublease or permission referred
to in such consent. Consent shall not be given for a restaurant, or
manufacturing business.
2. In lieu of granting its consent to a subleasing or assignment or this
lease, Landlord may, at any time when its consent is requested to an assignment
or subleasing, and within fifteen
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(15) days of the making of such request, notify Tenant that this lease is
terminated. Such termination shall take place no less than thirty (30) and no
mom than sixty (60) days after the date of such notice of termination by
Landlord. In the event of such termination, this lease shall upon the date so
selected by Landlord terminate as fully and completely as if the term hereof had
expired.
ARTICLE XV
SUBORDINATION
This lease is and shall be subject and subordinate to all mortgages and
ground leases which may now or hereafter affect the Building of which the
Premises form a part, and to all renewals, modifications, consolidations,
replacements and extensions thereof, and, although this subordination provision
shall be deemed for all purposes to be automatic and effective without any
further instrument on the part of the Tenant, the Tenant shall execute any
further instrument requested by the Landlord to confirm such subordination.
ARTICLE XVI
ADDITIONAL RENT
All amounts over and above the base rent payable by the Tenant to the
Landlord under the terms of this lease shall be deemed additional rent hereunder
and shall be payable to the Landlord upon demand, unless provision is made
herein for payment of such amount on a specific date or within a specific time,
and, in default of payment, may, at the Landlord's option, be added to and
become a part of any subsequent installment of base rent falling due, and the
Landlord shall have all the rights and remedies in the event of non-payment
thereof as in the case of the base rent.
ARTICLE XVII
CONDITIONAL LIMITATIONS;
DEFAULT PROVISIONS WAIVERS BY TENANT
1. If, during the term of this lease, the Tenant shall (a) apply for, or
consent in writing to, the appointment of a receiver, trustee or liquidator of
the Tenant or of all or substantially all of its assets, or (b) file a voluntary
petition in bankruptcy, or admit in writing its
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inability to pay its debts as they become due, or (c) make a general assignment
for the benefit of creditors, or (d) file a petition or an answer seeking
reorganization (other than a reorganization not involving the liabilities of the
Tenant) or arrangement with creditors, or take advantage of any insolvency law,
or (e) file an answer admitting the material allegations of a petition filed
against it in any bankruptcy, reorganization or insolvency proceeding, or, if an
order, judgment or decree shall be entered by any court of competent
jurisdiction on the application of a creditor adjudicating the Tenant a bankrupt
or insolvent, or approving a petition seeking reorganization of the Tenant
(other than a reorganization not involving the liabilities of the Tenant) or
appointment of a receiver, trustee or liquidator of the Tenant or, of all or
substantially all its assets, and such order, judgment or decree shall continue
uncontested and in effect for any period of sixty (60) consecutive days, the
Landlord may, at its option, give to the Tenant a notice of intention to end the
term of this lease at the expiration of five (5) days from the date of service
of such notice, and at the expiration of said five (5) days, the term or this
lease and all right, title and interest of the Tenant hereunder shall expire as
fully and completely as if that day were the date herein specifically fixed for
the expiration of the term, and the Tenant will then quit and surrender the
Property to the Landlord, but the Tenant shall remain liable as hereinafter
provided.
2. If, during the term of this lease, (a) the Tenant shall default in
fulfilling any of the covenants of this lease (other than the covenants for the
payment of base rent and additional rent payable by the Tenant hereunder), or
(b) the Property shall be left vacant or unoccupied or be deserted for a period
of fifteen (15) days, or (c) this lease, without the prior written consent of
the Landlord shall be assigned or transferred in any manner or shall, by
operation of law, pass to or devolve upon any third party, the Landlord may give
to the Tenant notice of any such default or the happening of any event referred
to above and if at the expiration of thirty (30) days after the service of such
a notice the default or event upon which said notice was based shall continue to
exist, or in the case of a default which cannot with due diligence be cured
within a period of thirty (30) days, if the Tenant fails to proceed promptly
after the service of such notice and with all due diligence to cure the same and
thereafter to prosecute the curing of such default with all due diligence (it
being intended that in connection with a default not susceptible of being cured
with due diligence within thirty (30) days that the time of the Tenant within
which to cure the same shall be extended for such period as may he necessary to
complete the same with all due diligence), the Landlord may give to the Tenant a
notice of intention to end the term of this lease,
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at the expiration of five (5) days from the date of the service of such second
notice, and at the expiration of said five (5) days the term of this lease and
all right, title and interest of the Tenant hereunder shall expire as fully and
completely as if that day were the date herein specifically fixed for the
expiration of the term, and the Tenant will then quit and surrender the Property
to the Landlord, but the Tenant shall remain liable as hereinafter provided.
3. If the Tenant shall default in the payment of the base rent or
additional rent, or any part of the same and such default shall continue for
three (3) days after notice thereof by the Landlord or if this lease shall
terminate as in subdivision 1 or subdivision 2 of this Article provided, the
Landlord or the Landlord's agents and servants may immediately or at any time
thereafter re-enter the Property and remove all persons and all or any property
therefrom, either by summary dispossess proceedings or by any suitable action or
proceeding at law, or otherwise, without being liable to indictment, prosecution
or damages therefor, and repossess and enjoy the Property with all additions,
alterations and improvements. Upon the termination of this lease by reason of
the happening of any of the events herein above described in subdivision 1 or
subdivision 2 of this Article, or in the event of the termination of this lease
by summary dispossess proceedings or under any provisions of law now or at any
time hereafter in force, by reason of, or based upon, or arising out of a
default under or breach of this lease on the part of the Tenant, or upon the
Landlord recovering possession of the Property in the manner or in any of the
circumstances hereinbefore mentioned, or in any other manner or circumstances
whatsoever, whether with or without legal proceedings, by reason of or based
upon or arising out of a default under or breach of this lease on the part of
the Tenant, the Landlord may, at its option, at any time, and from time to time,
relet the Property or any part or parts thereof for the account of the Tenant or
otherwise on such terms as the Landlord may elect, including the granting of
concessions, and receive and collect the rents therefor, applying the same first
to the payment of such expenses as the Landlord may have incurred in recovering
possession of the Property, including legal expenses, and for putting the same
into good order or condition or preparing or altering the same for re-rental,
and expenses, commissions and charges paid, assumed, or incurred by the Landlord
in and about the reletting of the Property, and then to the fulfillment of the
covenants of the Tenant hereunder. Any such reletting herein provided for may
be for the remainder of the term of this lease or for a longer or shorter
period. In any such case and whether or not the Property or any part thereof be
relet, the Tenant shall pay to the Landlord
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the base rent and additional rent required to be paid by the Tenant up to the
time of such termination of this lease, or of such recovery of possession of the
Property by the Landlord, as the case may be, and thereafter the Tenant
covenants and agrees, if required by the Landlord, to pay to the Landlord until
the end of the term of this lease as originally demised the equivalent of the
amount of all the base rent and additional rent reserved herein, less the net
avails of reletting, if any, and the same shall be due and payable by the Tenant
to the Landlord on the several rent days above specified, that is to say, upon
each of such rent days the Tenant shall pay to the Landlord the amount of the
deficiency then existing. In any such circumstances the Landlord shall have the
election, in place and stead of holding the Tenant so liable, forthwith to
recover against the Tenant as damages for loss of the bargain and not as a
penalty, an aggregate sum which, at the time of such termination of this lease,
or of such recovery of possession of the Property by the Landlord, as the case
may be, represents the then present worth of the excess, if any, of the
aggregate of the base rent and additional rent that would have accrued for the
balance of the term over the aggregate rental value of the Property for the
balance of such term, unless any statute or rule of law governing the proceeding
in which such damages are to be proven shall limit the amount allowed on such
claim, in which case the Landlord shall be entitled as and for liquidated
damages by reason of such breach and termination of this lease, the maximum
amount which may be allowed by or under such statute or rule of law. In
computing the additional rent that would have accrued for the balance of the
term, the annual amount of the additional rent shall be deemed to be an amount
equal to the average of the annual amounts paid by the Tenant pursuant to
Article XVI hereof for the three years preceding the year in which such
termination occurs, or for such lesser period of time as this lease may have
been in effect prior to such termination. Nothing herein contained shall limit
or prejudice the Landlord's right to prove and obtain as liquidated damages
arising out of such breach or termination the maximum amount allowed by any
statute or rule of law which may govern the proceedings in which such damages
are to be proved whether or not such an amount be greater, equal to, or less
than the amount of the excess of the base rent and additional rent over the
rental value referred to above.
4. The Tenant hereby expressly waives the service of notice of intention
to re-enter as provided for in any statue, or to institute legal proceedings to
that end, and also waives any and all rights of redemption in case the Tenant
shall be dispossessed by a judgment or by warrant of any court judge. The
Tenant also waives any and all right to a trial by jury in any matter
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arising out of or in connection with this lease or the right to assert a
counterclaim in any summary proceedings which may be instituted by the Landlord.
The terms "enter" and "re-enter," as used in this lease are not restricted to
their technical legal meaning. All of the covenants of the Tenant shall be
deemed and construed to be "conditions" as well as "covenants" as though the
words specifically expressing or importing covenants and conditions were used in
each separate instance. In the event any proceedings are brought against the
Tenant for non-payment of base rent or additional rent, or as a result of
termination of this lease, and whether or not such proceedings shall be
discontinued as a result of the Tenant paying such base rent or additional rent,
the Tenant will pay to the Landlord as a liquidated amount without necessity of
further liquidation or approval by the court, ten percent (10%) of the amount
claimed to be due from Tenant, if any, but in no event less than $1,000.00, for
payment of Landlord's court costs, expenses, and attorneys' fees. Said amount
shall be due and payable upon the mere commencement by Landlord of said judicial
proceedings against Tenant.
ARTICLE XVIII
LANDLORD'S REMEDIES
In the event the Tenant shall default in the performance of any of the
terms, covenants or provisions herein contained, the Landlord may, at its sole
option, perform the same for the account of the Tenant and any amount paid or
expense incurred by the Landlord in the performance of the same shall be repaid
by the Tenant on demand. In the event of a breach or threatened breach by the
Tenant or any subtenant or other person holding claim or claiming under the
Tenant of any of the covenants, conditions or provisions hereof, the Landlord
shall have the right of injunction to restrain the same, and the right to invoke
any remedy allowed by law or in equity, as if specific remedies, indemnity or
reimbursement were not herein provided for. The rights and remedies given to
the Landlord in this lease are distinct, separate and cumulative, and no one of
them, whether or not exercised by the Landlord, shall be deemed to be a waiver,
or in exclusion, of any of the others.
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ARTICLE XIX
FIRE OR OTHER CASUALTY
If the Premises shall be damaged by fire or other casualty, then Tenant
shall have the option to be exercised within sixty (60) days after such event,
to:
(A) Repair or restore the Premises; or
(B) terminate this lease (provided the fire or casualty is not
attributable to Tenant's negligence, acts or omissions) by notice to Landlord,
which termination shall be deemed to be effective as of the date of the fire or
casualty. If Tenant terminates this lease pursuant this section, Tenant will
surrender possession of the Property to Landlord immediately, free and clear of
all liens, mortgages and encumbrances created by or through Tenant, and assign
to Landlord (or, if the same has already been received by Tenant, pay to
Landlord) all of its right, title and interest in all of the proceeds from
Tenant's insurance upon the Premises. If the Building be so damaged that the
Landlord shall decide to demolish and/or to reconstruct the Building, the
Landlord may terminate this lease by notifying the Tenant within a reasonable
time after such damage of the Landlord's election to terminate this lease, such
termination to be effective immediately if the term shall not have commenced or
on a date to be specified in such notice if during the term. In the event of the
giving of such notice during the term of this lease, the rent shall be
apportioned and paid up to the time of such fire or other casualty if the
Premises are damaged, or up to the specified date of termination if the Premises
are not damaged.
ARTICLE XX
CONDEMNATION
If the Premises, or any part thereof, or any interest therein, be taken by
virtue of eminent domain or for any public or quasi-public use or purpose, this
lease and the estate hereby granted shall terminate as of the date of such
taking. If any part of the Building other than the Premises be so taken the
Landlord shall have the right to terminate this lease at the date of such taking
or within six (6) months thereafter by giving the Tenant thirty (30) days' prior
notice of the date of such termination. The Landlord shall be entitled to the
whole of any awards which may be paid or made in connection with any such
taking, and the Tenant shall not be entitled to any of such
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awards, hereby expressly assigning to the Landlord any and all right, title and
interest of the Tenant now or hereafter arising in and to any of such awards.
ARTICLE XXI
QUIET ENJOYMENT
The Tenant, on paying the rent and additional rent and keeping and
performing the conditions and covenants herein contained, shall and may
peaceably and quietly enjoy the Premises for the term aforesaid, subject,
however, to the terms of this lease and to the mortgages (if any) hereinbefore
mentioned.
ARTICLE XXII
NOTICES
Any statement or notice to, or demand on, the Tenant shall be deemed given
when mailed by certified or registered mail addressed to the Tenant at the
premises or when left upon the Premises, and any statement or notice to, or
demand on, the Landlord shall be deemed given when mailed by certified or
registered mail addressed to the Landlord at the following address if to Tenant:
1550 Ponce de Leon Ave., San Juan, Puerto Rico 00926, attention: Mr. Sergio
Moren, President, and if to Landlord, P.O. Box 363665, San Juan, Puerto Rico
00936-3665, attention: Mr. Edwin J. Colberg, General Manager, or such other
address as the patties from time to time shall designate by written notice.
ARTICLE XXIII
NO REPRESENTATIONS - MODIFICATIONS
The Tenant has hired the Premises after examination thereof and without
representation on the part of the Landlord. No representative or agent of the
Landlord is authorized to make representations in reference thereto or to vary
or modify this agreement in any way and no right of the Landlord can be waived
except in writing duly signed by the Landlord. The receipt by the Landlord of
base rent or any other sum payable by the Tenant with knowledge of the breach of
any covenant of this lease shall not be deemed a waiver of such breach and no
act or omission of the Landlord or its agent during the term of this lease shall
be deemed an acceptance of a surrender of the Premises and no agreement to
accept a surrender of the Premises shall be valid
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unless it be made in writing and subscribed by the Landlord. This lease contains
all the agreements and conditions made between the parties hereto with respect
to the Premises and this lease cannot he changed orally, but any additions to or
changes in this lease must be in writing signed by the party to be charged.
ARTICLE XXIV
OPTION TO RENEW
Tenant is hereby granted two (2) consecutive one (1) year options to extend
this lease upon the same terms and conditions contained herein (except for the
rent which shall be increased by 3% per year during each option year) provided,
however, that no default of which Landlord has notified Tenant exists at the
time of exercise any such options and remains uncured, unless Landlord waives
the existence of such default in writing. Such options shall be exercised by
written notice to Landlord not less than ninety (90) days prior to the
expiration of the initial term or the then current option term, as appropriate.
ARTICLE XXV
HOLDING OVER
This Lease shall automatically terminate and be of no further force or
effect upon the expiration of the term or the expiration of the term of the
options (as the case may be) and any holding over by Tenant after such
expiration shall not constitute a renewal hereof or provide Tenant with any
rights hereunder except that Tenant shall be deemed to be in possession of the
Property on a month to month tenancy commencing on the first day following the
expiration of this lease and a tenant at sufferance of Landlord. Any such
tenancy shall he subject to the terms and conditions herein contained, except
that the monthly rent for the Premises shall be equal to double the monthly rent
as of the date of expiration of the term (or options as the case may be) and
said tenancy may be terminated at any time upon thirty (30) days' written notice
by Landlord to Tenant. The acceptance of rent under the provisions of this
Article XXV, shall not, however, be construed as a waiver by Landlord of any
rights under this Lease.
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ARTICLE XXVI
ARTICLE TITLES
The parties agree that the article titles are inserted only as a matter of
convenience and shall in no way define, limit or otherwise affect the scope or
intent of the particular articles to which they refer.
ARTICLE XXVII
SEVERABILITY
The Articles and provisions of this Agreement are independent of and
separable from each other, and no Article or provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that, for any reason,
any other Article or provision may be invalid or unenforceable in whole or in
part.
IN WITNESS WHEREOF, the parties have executed this agreement on the date
first set forth above in San Juan, Puerto Rico.
CORTELEO PUERTO RICO, INC.
/s/ Sergio Moren
-------------------------------------
By: Sergio Moren
CORTELCO SYSTEM PUERTO RICO, INC.
/s/ Edwin J. Colberg
-------------------------------------
By: Edwin J. Colberg
16.
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EXHIBIT 10.12
April 12, 1999
Mr. Dave Fredrick
Mr. Frank Naso
BCS Technologies, Inc.
8400 E. Prentice avenue, Suite 1320
Englewood, CO 80111
Re: Letter of Understanding for continued employment with Cortelco
Systems, Inc. post-merger
Gentlemen:
Please allow this letter to serve as a letter of understanding regarding
your continued employment with Cortelco Systems, Inc. ("CSI") following the
execution of the Merger Agreement by and between BCS Technologies, Inc. ("BCS"),
BCS Mergersub, Inc. ("Mergersub"), and CSI. This letter is intended to provide
a summary, at a minimum, of the basic terms of your continued employment, with
written formalization of same to occur after the consummation of the merger.
The following are features which will pertain to both Mr. Fredrick and Mr.
Naso ("Employees"):
. Job site will remain in Denver, CO;
. Employees will function in employment as in present capacity;
. Employees will have personal control over travel schedule;
. Employees may only be terminated, prior to the consummation of an
IPO, for "gross misdeeds"; standard for termination may be changed
at the discretion of Cortelco's Board of Directors following the
consummation of an IPO;
. Options may be purchased by Employees of CSI common stock as
follows:
. 60,000 shares to vest on January 2, 2001
. 10,000 shares to vest on January 2, 2002
. For options to be exercised, Employees must have been in continued
employment with CSI, and be employed by CSI on the date the options
vest, unless terminated by CSI in which case the options will vest
immediately. Said options will terminate five (5) years after the
date they vest.
With regard to salaries and vacations, the following pertains to each
Employee:
<PAGE>
. Dave Frederick is to earn a salary of $165,000 in 1999 and a salary
of $175,000 in 2000. Mr. Fredrick is to be entitled to five (5)
weeks paid vacation in 1999 and six (6) weeks paid vacation in
2000.
. Frank Naso is to earn a salary of $120,000 in 1999 and a salary of
$130,000 in 2000. Mr. Naso is to be entitled to five (5) weeks paid
vacation in 1999 and six (6) weeks paid vacation in 2000.
After the consummation of the merger, a formalization of the above, with
any additional negotiated points, will be completed in due course.
Sincerely,
/s/ Stephen N. Samp
Stephen N. Samp
Secretary of Cortelco Systems, Inc.
<PAGE>
Exhibit 10.13
CORTELCO SYSTEMS, INC.
1999 EQUITY INCENTIVE PLAN
ADOPTED APRIL 7, 1999
APPROVED BY STOCKHOLDERS __________, 1999
TERMINATION DATE: APRIL 6, 2009
1. PURPOSES.
(A) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock
Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(B) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means
by which eligible recipients of Stock Awards may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of the
following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(C) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Stock Awards, to secure
and retain the services of new members of this group and to provide incentives
for such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(A) "AFFILIATE" means any parent corporation or subsidiary corporation of
the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(B) "BOARD" means the Board of Directors of the Company.
(C) "CODE" means the Internal Revenue Code of 1986, as amended.
(D) "COMMITTEE" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).
(E) "COMMON STOCK" means the common stock of the Company.
(F) "COMPANY" means Cortelco Systems, Inc., a Delaware corporation.
(G) "CONSULTANT" means any person, including an advisor, (i) engaged by
the Company or an Affiliate to render consulting or advisory services and who is
compensated for
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such services or (ii) who is a member of the Board of Directors of an Affiliate.
However, the term "Consultant" shall not include either Directors who are not
compensated by the Company for their services as Directors or Directors who are
merely paid a director's fee by the Company for their services as Directors.
(H) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director will not
constitute an interruption of Continuous Service. The Board or the chief
executive officer of the Company, in that party's sole discretion, may determine
whether Continuous Service shall be considered interrupted in the case of any
leave of absence approved by that party, including sick leave, military leave or
any other personal leave.
(I) "COVERED EMPLOYEE" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(J) "DIRECTOR" means a member of the Board of Directors of the Company.
(K) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(L) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(M) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(N) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(I) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the last market trading day prior to the day
of determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.
(II) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
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(III) Prior to the Listing Date, the value of the Common Stock
shall be determined in a manner consistent with Section 260.140.50 of Title 10
of the California Code of Regulations.
(O) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(P) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.
(Q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(R) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(S) "OFFICER" means (i) before the Listing Date, any person designated by
the Company as an officer and (ii) on and after the Listing Date, a person who
is an officer of the Company within the meaning of Section 16 of the Exchange
Act and the rules and regulations promulgated thereunder.
(T) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.
(U) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(V) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.
(W) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury Regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax
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<PAGE>
qualified pension plan), was not an officer of the Company or an "affiliated
corporation" at any time and is not currently receiving direct or indirect
remuneration from the Company or an "affiliated corporation" for services in any
capacity other than as a Director or (ii) is otherwise considered an "outside
director" for purposes of Section 162(m) of the Code.
(X) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding Stock
Award.
(Y) "PLAN" means this Cortelco Systems, Inc. 1999 Equity Incentive Plan.
(Z) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
(AA) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(BB) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.
(CC) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(DD) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to own
pursuant to Section 424(d) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any of its Affiliates.
3. ADMINISTRATION.
(A) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c). Any interpretation of the Plan by the Board and any decision by
the Board under the Plan shall be final and binding on all persons.
(B) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(I) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.
(II) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any
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Stock Award Agreement, in a manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective.
(III) To amend the Plan or a Stock Award as provided in Section
12.
(IV) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(C) DELEGATION TO COMMITTEE.
(I) GENERAL. The Board may delegate administration of the Plan to a
Committee or Committees of one (1) or more members of the Board, and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated. If administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board, including the power to delegate to a subcommittee any of
the administrative powers the Committee is authorized to exercise (and
references in this Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
(II) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At
such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more Non-
Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (1) delegate to a committee of one or
more members of the Board who are not Outside Directors the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or) (2)
delegate to a committee of one or more members of the Board who are not Non-
Employee Directors the authority to grant Stock Awards to eligible persons who
are not then subject to Section 16 of the Exchange Act.
4. SHARES SUBJECT TO THE PLAN.
(A) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate two million
(2,000,000) shares of Common Stock.
(B) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the shares of Common Stock not acquired under such Stock
Award shall revert to and again become available for issuance under the Plan. If
any Common Stock acquired pursuant to the exercise of an Option shall for any
reason be repurchased by the Company under an unvested share repurchase option
provided under the Plan, the stock repurchased by the Company under
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such repurchase option shall not revert to and again become available for
issuance under the Plan.
(C) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may
be unissued shares or reacquired shares, bought on the market or otherwise.
(D) SHARE RESERVE LIMITATION. Prior to the Listing Date and to the extent
then required by Section 260.140.45 of Title 10 of the California Code of
Regulations, the total number of shares of Common Stock issuable upon exercise
of all outstanding Options and the total number of shares of Common Stock
provided for under any stock bonus or similar plan of the Company shall not
exceed the applicable percentage as calculated in accordance with the conditions
and exclusions of Section 260.140.45 of Title 10 of the California Code of
Regulations, based on the shares of Common Stock of the Company that are
outstanding at the time the calculation is made.
5. ELIGIBILITY.
(A) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be
granted only to Employees. Stock Awards other than Incentive Stock Options may
be granted to Employees, Directors and Consultants.
(B) TEN PERCENT STOCKHOLDERS.
(I) A Ten Percent Stockholder shall not be granted an Incentive
Stock Option unless the exercise price of such Option is at least one hundred
ten percent (110%) of the Fair Market Value of the Common Stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.
(II) Prior to the Listing Date, a Ten Percent Stockholder shall
not be granted a Nonstatutory Stock Option unless the exercise price of such
Option is at least (i) one hundred ten percent (110%) of the Fair Market Value
of the Common Stock at the date of grant or (ii) such lower percentage of the
Fair Market Value of the Common Stock at the date of grant as is permitted by
Section 260.140.41 of Title 10 of the California Code of Regulations at the time
of the grant of the Option.
(III) Prior to the Listing Date, a Ten Percent Stockholder shall
not be granted a restricted stock award unless the purchase price of the
restricted stock is at least (i) one hundred percent (100%) of the Fair Market
Value of the Common Stock at the date of grant or (ii) such lower percentage of
the Fair Market Value of the Common Stock at the date of grant as is permitted
by Section 260.140.41 of Title 10 of the California Code of Regulations at the
time of the grant of the Option.
(C) SECTION 162(M) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in the shares of Common Stock, no Employee
shall be eligible to be granted Options covering more than five hundred thousand
(500,000) shares of Common Stock during any calendar year. This subsection 5(c)
shall not apply prior to the Listing Date and, following the Listing Date, this
subsection 5(c) shall not apply until (i) the earliest of: (1) the
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first material modification of the Plan (including any increase in the number of
shares of Common Stock reserved for issuance under the Plan in accordance with
Section 4); (2) the issuance of all of the shares of Common Stock reserved for
issuance under the Plan; (3) the expiration of the Plan; or (4) the first
meeting of stockholders at which Directors are to be elected that occurs after
the close of the third calendar year following the calendar year in which
occurred the first registration of an equity security under Section 12 of the
Exchange Act; or (ii) such other date required by Section 162(m) of the Code and
the rules and regulations promulgated thereunder.
(D) CONSULTANTS.
(I) Prior to the Listing Date, a Consultant shall not be
eligible for the grant of a Stock Award if, at the time of grant, either the
offer or the sale of the Company's securities to such Consultant is not exempt
under Rule 701 of the Securities Act ("Rule 701") because of the nature of the
services that the Consultant is providing to the Company, or because the
Consultant is not a natural person, or as otherwise provided by Rule 701, unless
the Company determines that such grant need not comply with the requirements of
Rule 701 and will satisfy another exemption under the Securities Act as well as
comply with the securities laws of all other relevant jurisdictions.
(II) From and after the Listing Date, a Consultant shall not be
eligible for the grant of a Stock Award if, at the time of grant, a Form S-8
Registration Statement under the Securities Act ("Form S-8") is not available to
register either the offer or the sale of the Company's securities to such
Consultant because of the nature of the services that the Consultant is
providing to the Company, or because the Consultant is not a natural person, or
as otherwise provided by the rules governing the use of Form S-8, unless the
Company determines both (i) that such grant (A) shall be registered in another
manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or
(B) does not require registration under the Securities Act in order to comply
with the requirements of the Securities Act, if applicable, and (ii) that such
grant complies with the securities laws of all other relevant jurisdictions.
(III) As of April 7, 1999 Rule 701 and Form S-8 generally are
available to consultants and advisors only if (i) they are natural persons; (ii)
they provide bona fide services to the issuer, its parents, its majority-owned
subsidiaries or majority-owned subsidiaries of the issuer's parent; and (iii)
the services are not in connection with the offer or sale of securities in a
capital-raising transaction, and do not directly or indirectly promote or
maintain a market for the issuer's securities.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and, if certificates are issued, a separate certificate or certificates
will be issued for shares of Common Stock purchased on exercise of each type of
Option. The provisions of separate Options need not be identical, but
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each Option shall include (through incorporation of provisions hereof by
reference in the Option or otherwise) the substance of each of the following
provisions:
(A) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(B) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions
of subsection 5(b) regarding Ten Percent Stockholders, the exercise price of
each Incentive Stock Option shall be not less than one hundred percent (100%) of
the Fair Market Value of the Common Stock subject to the Option on the date the
Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may
be granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.
(C) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Nonstatutory Stock Option granted prior to the Listing Date shall
be not less than eighty-five percent (85%) of the Fair Market Value of the
Common Stock subject to the Option on the date the Option is granted. The
exercise price of each Nonstatutory Stock Option granted on or after the Listing
Date shall be not less than eighty-five percent (85%) of the Fair Market Value
of the Common Stock subject to the Option on the date the Option is granted.
Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with
an exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
(D) CONSIDERATION. The purchase price of Common Stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the
Company of other Common Stock, (2) according to a deferred payment or other
similar arrangement with the Optionholder or (3) in any other form of legal
consideration that may be acceptable to the Board; provided, however, that at
any time that the Company is incorporated in Delaware, payment of the Common
Stock's "par value," as defined in the Delaware General Corporation Law, shall
not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(E) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing, the Optionholder may,
by delivering written notice to the Company, in a form
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satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.
(F) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock
Option granted prior to the Listing Date shall not be transferable except by
will or by the laws of descent and distribution and, to the extent provided in
the Option Agreement, to such further extent as permitted by Section
260.140.41(d) of Title 10 of the California Code of Regulations at the time of
the grant of the Option, and shall be exercisable during the lifetime of the
Optionholder only by the Optionholder. A Nonstatutory Stock Option granted on or
after the Listing Date shall be transferable to the extent provided in the
Option Agreement. If the Nonstatutory Stock Option does not provide for
transferability, then the Nonstatutory Stock Option shall not be transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.
(G) VESTING GENERALLY. The total number of shares of Common Stock subject
to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.
(H) MINIMUM VESTING PRIOR TO THE LISTING DATE. Notwithstanding the
foregoing subsection 6(g), to the extent that the following restrictions on
vesting are required by Section 260.140.41(f) of Title 10 of the California Code
of Regulations at the time of the grant of the Option, then:
(I) Options granted prior to the Listing Date to an Employee who
is not an Officer, Director or Consultant shall provide for vesting of the total
number of shares of Common Stock at a rate of at least twenty percent (20%) per
year over five (5) years from the date the Option was granted, subject to
reasonable conditions such as continued employment; and
(II) Options granted prior to the Listing Date to Officers,
Directors or Consultants may be made fully exercisable, subject to reasonable
conditions such as continued employment, at any time or during any period
established by the Company.
(I) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Optionholder's
Continuous Service (or such longer or shorter period specified in the Option
Agreement, which period shall not be
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less than thirty (30) days for Options granted prior to the Listing Date unless
such termination is for cause), or (ii) the expiration of the term of the Option
as set forth in the Option Agreement. If, after termination, the Optionholder
does not exercise his or her Option within the time specified in the Option
Agreement, the Option shall terminate.
(J) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionholder's Continuous Service (other than upon the Optionholder's death or
Disability) would be prohibited at any time solely because the issuance of
shares of Common Stock would violate the registration requirements under the
Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in subsection 6(a) or (ii) the
expiration of a period of three (3) months after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.
(K) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement, which period shall not be less than six (6) months for
Options granted prior to the Listing Date) or (ii) the expiration of the term of
the Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified
herein, the Option shall terminate.
(L) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but
only within the period ending on the earlier of (1) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement, which period shall not be less than six (6) months for
Options granted prior to the Listing Date) or (2) the expiration of the term of
such Option as set forth in the Option Agreement. If, after death, the Option
is not exercised within the time specified herein, the Option shall terminate.
(M) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Subject to the "Repurchase Limitation" in subsection 10(h), any
unvested shares of Common Stock so purchased may be subject to a repurchase
option in favor of the Company or to any other restriction the Board determines
to be appropriate.
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(N) RIGHT OF REPURCHASE. Subject to the "Repurchase Limitation" in
subsection 10(h), the Option may, but need not, include a provision whereby the
Company may elect, prior to the Listing Date, to repurchase all or any part of
the vested shares of Common Stock acquired by the Optionholder pursuant to the
exercise of the Option.
(O) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionholder of
the intent to transfer all or any part of the shares of Common Stock received
upon the exercise of the Option. Except as expressly provided in this subsection
6(o), such right of first refusal shall otherwise comply with any applicable
provisions of the Bylaws of the Company.
(P) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option Agreement
a provision entitling the Optionholder to a further Option (a "Re-Load Option")
in the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares of Common Stock
equal to the number of shares of Common Stock surrendered as part or all of the
exercise price of such Option; (ii) have an expiration date which is the same as
the expiration date of the Option the exercise of which gave rise to such Re-
Load Option; and (iii) have an exercise price which is equal to one hundred
percent (100%) of the Fair Market Value of the Common Stock subject to the Re-
Load Option on the date of exercise of the original Option. Notwithstanding the
foregoing, a Re-Load Option shall be subject to the same exercise price and term
provisions heretofore described for Options under the Plan.
Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on the exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares of Common Stock under
subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options
under subsection 5(c) and shall be subject to such other terms and conditions as
the Board may determine which are not inconsistent with the express provisions
of the Plan regarding the terms of Options.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(A) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:
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(I) CONSIDERATION. A stock bonus may be awarded in consideration
for past services actually rendered to the Company or an Affiliate for its
benefit.
(II) VESTING. Subject to the "Repurchase Limitation" in
subsection 10(h), shares of Common Stock awarded under the stock bonus agreement
may, but need not, be subject to a share repurchase option in favor of the
Company in accordance with a vesting schedule to be determined by the Board.
(III) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to
the "Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may reacquire any or all of the
shares of Common Stock held by the Participant which have not vested as of the
date of termination under the terms of the stock bonus agreement.
(IV) TRANSFERABILITY. For a stock bonus award made before the
Listing Date, rights to acquire shares of Common Stock under the stock bonus
agreement shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant. For a stock bonus award made on or after the Listing
Date, rights to acquire shares of Common Stock under the stock bonus agreement
shall be transferable by the Participant only upon such terms and conditions as
are set forth in the stock bonus agreement, as the Board shall determine in its
discretion, so long as Common Stock awarded under the stock bonus agreement
remains subject to the terms of the stock bonus agreement.
(B) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The terms and conditions of the restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(I) PURCHASE PRICE. Subject to the provisions of subsection 5(b)
regarding Ten Percent Stockholders, the purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. For restricted stock
awards made prior to the Listing Date, the purchase price shall not be less than
eighty-five (85%) of the Common Stock's Fair Market Value on the date such award
is made or at the time the purchase is consummated. For restricted stock awards
made on or after the Listing Date, the purchase price shall not be less than
eighty-five percent (85%) of the Common Stock's Fair Market Value on the date
such award is made or at the time the purchase is consummated.
(II) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either: (i) in
cash at the time of purchase; (ii) at the discretion of the Board, according to
a deferred payment or other similar arrangement with the Participant; or (iii)
in any other form of legal consideration that may be
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acceptable to the Board in its discretion; provided, however, that at any time
that the Company is incorporated in Delaware, then payment of the Common Stock's
"par value," as defined in the Delaware General Corporation Law, shall not be
made by deferred payment.
(III) VESTING. Subject to the "Repurchase Limitation" in subsection
10(h), shares of Common Stock acquired under the restricted stock purchase
agreement may, but need not, be subject to a share repurchase option in favor of
the Company in accordance with a vesting schedule to be determined by the Board.
(IV) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to
the "Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may repurchase or otherwise reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the restricted stock
purchase agreement.
(V) TRANSFERABILITY. For a restricted stock award made before the
Listing Date, rights to acquire shares of Common Stock under the restricted
stock purchase agreement shall not be transferable except by will or by the laws
of descent and distribution and shall be exercisable during the lifetime of the
Participant only by the Participant. For a restricted stock award made on or
after the Listing Date, rights to acquire shares of Common Stock under the
restricted stock purchase agreement shall be transferable by the Participant
only upon such terms and conditions as are set forth in the restricted stock
purchase agreement, as the Board shall determine in its discretion, so long as
Common Stock awarded under the restricted stock purchase agreement remains
subject to the terms of the restricted stock purchase agreement.
8. COVENANTS OF THE COMPANY.
(A) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(B) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to grant Stock Awards and to issue and sell shares of Common
Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain
from any such regulatory commission or agency the authority which counsel for
the Company deems necessary for the lawful issuance and sale of Common Stock
under the Plan, the Company shall be relieved from any liability for failure to
issue and sell Common Stock upon exercise of such Stock Awards unless and until
such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
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10. MISCELLANEOUS.
(A) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(B) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares of
Common Stock subject to such Stock Award unless and until such Participant has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(C) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
the capacity in effect at the time the Stock Award was granted or shall affect
the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.
(D) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
(E) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (iii) the issuance of the shares
of Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or (iv) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates
14
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issued under the Plan as such counsel deems necessary or appropriate in order to
comply with applicable securities laws, including, but not limited to, legends
restricting the transfer of the Common Stock.
(F) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the participant as a result of the exercise
or acquisition of Common Stock under the Stock Award; or (iii) delivering to the
Company owned and unencumbered shares of Common Stock.
(G) INFORMATION OBLIGATION. Prior to the Listing Date, to the extent
required by Section 260.140.46 of Title 10 of the California Code of
Regulations, the Company shall deliver financial statements to Participants at
least annually. This subsection 10(g) shall not apply to key Employees whose
duties in connection with the Company assure them access to equivalent
information.
(H) REPURCHASE LIMITATION. The terms of any repurchase option shall be
specified in the Stock Award and may be either at Fair Market Value at the time
of repurchase or at not less than the original purchase price. To the extent
required by Section 260.140.41 and Section 260.140.42 of Title 10 of the
California Code of Regulations at the time a Stock Award is made, any repurchase
option contained in a Stock Award granted prior to the Listing Date to a person
who is not an Officer, Director or Consultant shall be upon the terms described
below:
(I) FAIR MARKET VALUE. If the repurchase option gives the Company
the right to repurchase the shares of Common Stock upon termination of
employment at not less than the Fair Market Value of the shares of Common Stock
to be purchased on the date of termination of Continuous Service, then (i) the
right to repurchase shall be exercised for cash or cancellation of purchase
money indebtedness for the shares of Common Stock within ninety (90) days of
termination of Continuous Service (or in the case of shares of Common Stock
issued upon exercise of Stock Awards after such date of termination, within
ninety (90) days after the date of the exercise) or such longer period as may be
agreed to by the Company and the Participant (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code regarding
"qualified small business stock") and (ii) the right terminates when the shares
of Common Stock become publicly traded.
(II) ORIGINAL PURCHASE PRICE. If the repurchase option gives the
Company the right to repurchase the shares of Common Stock upon termination of
Continuous Service at the original purchase price, then (i) the right to
repurchase at the original purchase price shall lapse at the rate of at least
twenty percent (20%) of the shares of Common Stock per year over five (5) years
from the date the Stock Award is granted (without respect to the date the Stock
Award was exercised or became exercisable) and (ii) the right to repurchase
shall be exercised for cash or cancellation of purchase money indebtedness for
the shares of Common Stock within ninety
15
<PAGE>
(90) days of termination of Continuous Service (or in the case of shares of
Common Stock issued upon exercise of Options after such date of termination,
within ninety (90) days after the date of the exercise) or such longer period as
may be agreed to by the Company and the Participant (for example, for purposes
of satisfying the requirements of Section 1202(c)(3) of the Code regarding
"qualified small business stock").
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(A) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common Stock
subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person pursuant to subsection 5(c), and the outstanding Stock
Awards will be appropriately adjusted in the class(es) and number of securities
and price per share of Common Stock subject to such outstanding Stock Awards.
The Board shall make such adjustments, and its determination shall be final,
binding and conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a transaction "without receipt of consideration"
by the Company.)
(B) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then all outstanding Stock Awards
shall terminate immediately prior to such event.
(C) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (i) a sale, lease or other disposition of all or
substantially all of the assets of the Company, (ii) a merger or consolidation
in which the Company is not the surviving corporation or (iii) a reverse merger
in which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then any surviving corporation or acquiring corporation shall assume
any Stock Awards outstanding under the Plan or shall substitute similar stock
awards (including an award to acquire the same consideration paid to the
stockholders in the transaction described in this subsection 11(c)) for those
outstanding under the Plan. In the event any surviving corporation or acquiring
corporation refuses to assume such Stock Awards or to substitute similar stock
awards for those outstanding under the Plan, then with respect to Stock Awards
held by Participants whose Continuous Service has not terminated, the vesting of
such Stock Awards (and, if applicable, the time during which such Stock Awards
may be exercised) shall be accelerated in full, and the Stock Awards shall
terminate if not exercised (if applicable) at or prior to such event. With
respect to any other Stock Awards outstanding under the Plan, such Stock Awards
shall terminate if not exercised (if applicable) prior to such event.
16
<PAGE>
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(A) AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in Common Stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.
(B) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for stockholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
(C) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(D) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.
(E) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(A) PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(B) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan
is in effect except with the written consent of the Participant.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Award shall be exercised (or, in the case of a stock bonus, shall be granted)
unless and until the Plan has been approved by the stockholders of the Company,
which approval shall be within twelve (12) months before or after the date the
Plan is adopted by the Board.
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<PAGE>
15. CHOICE OF LAW.
The law of the State of Delaware shall govern all questions concerning the
construction, validity and interpretation of this Plan, without regard to such
state's conflict of laws rules.
18
<PAGE>
CORTELCO SYSTEMS, INC.
1999 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(INCENTIVE AND NONSTATUTORY STOCK OPTIONS)
Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock
Option Agreement, Cortelco Systems, Inc. (the "Company") has granted you an
option under its 1999 Equity Incentive Plan (the "Plan") to purchase the number
of shares of the Company's Common Stock indicated in your Grant Notice at the
exercise price indicated in your Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option will
vest as provided in your Grant Notice, provided that vesting will cease upon the
termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common
Stock subject to your option and your exercise price per share referenced in
your Grant Notice may be adjusted from time to time for Capitalization
Adjustments, as provided in the Plan.
3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in your
Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of
your option is permitted) and subject to the provisions of your option, you may
elect at any time that is both (i) during the period of your Continuous Service
and (ii) during the term of your option, to exercise all or part of your option,
including the nonvested portion of your option; provided, however, that:
(A) a partial exercise of your option shall be deemed to cover first
vested shares of Common Stock and then the earliest vesting installment of
unvested shares of Common Stock;
(B) any shares of Common Stock so purchased from installments that
have not vested as of the date of exercise shall be subject to the purchase
option in favor of the Company as described in the Company's form of Early
Exercise Stock Purchase Agreement;
(C) you shall enter into the Company's form of Early Exercise Stock
Purchase Agreement with a vesting schedule that will result in the same vesting
as if no early exercise had occurred; and
(D) if your option is an incentive stock option, then, as provided in
the Plan, to the extent that the aggregate Fair Market Value (determined at the
time of grant) of the shares of Common Stock with respect to which your option
plus all other incentive stock options you hold
<PAGE>
are exercisable for the first time by you during any calendar year (under all
plans of the Company and its Affiliates) exceeds one hundred thousand dollars
($100,000), your option(s) or portions thereof that exceed such limit (according
to the order in which they were granted) shall be treated as nonstatutory stock
options.
4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of
the exercise price in cash or by check or in any other manner PERMITTED BY YOUR
-----------------
GRANT NOTICE, which may include one or more of the following:
- ------------
(A) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in The Wall Street Journal, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board that,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.
(B) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, by delivery of
already-owned shares of Common Stock either that you have held for the period
required to avoid a charge to the Company's reported earnings (generally six
months) or that you did not acquire, directly or indirectly from the Company,
that are owned free and clear of any liens, claims, encumbrances or security
interests, and that are valued at Fair Market Value on the date of exercise.
"Delivery" for these purposes, in the sole discretion of the Company at the time
you exercise your option, shall include delivery to the Company of your
attestation of ownership of such shares of Common Stock in a form approved by
the Company. Notwithstanding the foregoing, you may not exercise your option by
tender to the Company of Common Stock to the extent such tender would violate
the provisions of any law, regulation or agreement restricting the redemption of
the Company's stock.
(C) Pursuant to the following deferred payment alternative:
(I) Not less than one hundred percent (100%) of the aggregate
exercise price, plus accrued interest, shall be due four (4) years from date
of exercise or, at the Company's election, upon termination of your
Continuous Service.
(II) Interest shall be compounded at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Code, of any portion of
any amounts other than amounts stated to be interest under the deferred
payment arrangement.
(III) At any time that the Company is incorporated in Delaware,
payment of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall be made in cash and not by deferred payment.
<PAGE>
(IV) In order to elect the deferred payment alternative, you
must, as a part of your written notice of exercise, give notice of the
election of this payment alternative and, in order to secure the payment of
the deferred exercise price to the Company hereunder, if the Company so
requests, you must tender to the Company a promissory note and a security
agreement covering the purchased shares of Common Stock, both in form and
substance satisfactory to the Company, or such other or additional
documentation as the Company may request.
5. WHOLE SHARES. You may exercise your option only for whole shares of
Common Stock.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common Stock are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the registration
requirements of the Securities Act. The exercise of your option must also
comply with other applicable laws and regulations governing your option, and you
may not exercise your option if the Company determines that such exercise would
not be in material compliance with such laws and regulations.
7. TERM. The term of your option commences on the Date of Grant and
expires upon the EARLIEST of the following:
(A) three (3) months after the termination of your Continuous Service
for any reason other than your Disability or death, provided that if during any
part of such three- (3-) month period your option is not exercisable solely
because of the condition set forth in the preceding paragraph relating to
"Securities Law Compliance," your option shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of your Continuous Service;
(B) twelve (12) months after the termination of your Continuous
Service due to your Disability;
(C) eighteen (18) months after your death if you die either during
your Continuous Service or within three (3) months after your Continuous Service
terminates;
(D) the Expiration Date indicated in your Grant Notice; or
(E) the tenth (10th) anniversary of the Date of Grant.
If your option is an incentive stock option, note that, to obtain the
federal income tax advantages associated with an "incentive stock option," the
Code requires that at all times beginning on the date of grant of your option
and ending on the day three (3) months before the date of your option's
exercise, you must be an employee of the Company or an Affiliate, except in the
event of your death or Disability. The Company has provided for extended
exercisability of your option under certain circumstances for your benefit but
cannot guarantee that your option
<PAGE>
will necessarily be treated as an "incentive stock option" if you continue to
provide services to the Company or an Affiliate as a Consultant or Director
after your employment terminates or if you otherwise exercise your option more
than three (3) months after the date your employment terminates.
8. EXERCISE.
(A) You may exercise the vested portion of your option (and the
unvested portion of your option if your Grant Notice so permits) during its term
by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(B) By exercising your option you agree that, as a condition to any
exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.
(C) If your option is an incentive stock option, by exercising your
option you agree that you will notify the Company in writing within fifteen (15)
days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of your option that occurs within two (2) years after the
date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.
(D) By exercising your option you agree that the Company (or a
representative of the underwriter(s)) may, in connection with the first
underwritten registration of the offering of any securities of the Company under
the Securities Act, require that you not sell, dispose of, transfer, make any
short sale of, grant any option for the purchase of, or enter into any hedging
or similar transaction with the same economic effect as a sale, any shares of
Common Stock or other securities of the Company held by you, for a period of
time specified by the underwriter(s) (not to exceed one hundred eighty (180)
days) following the effective date of the registration statement of the Company
filed under the Securities Act. You further agree to execute and deliver such
other agreements as may be reasonably requested by the Company and/or the
underwriter(s) that are consistent with the foregoing or that are necessary to
give further effect thereto. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to your shares of
Common Stock until the end of such period.
9. TRANSFERABILITY. Your option is not transferable, except by will or
by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
<PAGE>
10. RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon
exercise of your option are subject to any right of first refusal that may be
described in the Company's bylaws in effect at such time the Company elects to
exercise its right. The Company's right of first refusal shall expire on the
Listing Date.
11. RIGHT OF REPURCHASE. To the extent provided in the Company's bylaws
as amended from time to time, the Company shall have the right to repurchase all
or any part of the shares of Common Stock you acquire pursuant to the exercise
of your option.
12. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or
an Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
13 WITHHOLDING OBLIGATIONS.
(A) At the time you exercise your option, in whole or in part, or at
any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "cashless
exercise" pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection
with your option.
(B) Upon your request and subject to approval by the Company, in its
sole discretion, and compliance with any applicable conditions or restrictions
of law, the Company may withhold from fully vested shares of Common Stock
otherwise issuable to you upon the exercise of your option a number of whole
shares of Common Stock having a Fair Market Value, determined by the Company as
of the date of exercise, not in excess of the minimum amount of tax required to
be withheld by law. If the date of determination of any tax withholding
obligation is deferred to a date later than the date of exercise of your option,
share withholding pursuant to the preceding sentence shall not be permitted
unless you make a proper and timely election under Section 83(b) of the Code,
covering the aggregate number of shares of Common Stock acquired upon such
exercise with respect to which such determination is otherwise deferred, to
accelerate the determination of such tax withholding obligation to the date of
exercise of your option. Notwithstanding the filing of such election, shares of
Common Stock shall be withheld solely from fully vested shares of Common Stock
determined as of the date of exercise of your option that are otherwise issuable
to you upon such exercise. Any adverse consequences to you arising in connection
with such share withholding procedure shall be your sole responsibility.
(C) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise
<PAGE>
your option when desired even though your option is vested, and the Company
shall have no obligation to issue a certificate for such shares of Common Stock
or release such shares of Common Stock from any escrow provided for herein.
14. NOTICES. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by mail by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.
15. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions
of the Plan, the provisions of which are hereby made a part of your option, and
is further subject to all interpretations, amendments, rules and regulations
which may from time to time be promulgated and adopted pursuant to the Plan. In
the event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.
<PAGE>
EXHIBIT 10.14
CORTELCO SYSTEMS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED APRIL 7, 1999
APPROVED BY THE STOCKHOLDERS ON _____________, 1999
EFFECTIVE DATE: [DATE OF THE INITIAL PUBLIC OFFERING]
1. PURPOSE.
(A) The purpose of this 1999 Employee Stock Purchase Plan (the "Plan") is
to provide a means by which employees of Cortelco Systems, Inc., a Delaware
corporation (the "Company"), and its Affiliates, as defined in subparagraph
1(b), which are designated as provided in subparagraph 2(b), may be given an
opportunity to purchase stock of the Company.
(B) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(C) The Company, by means of the Plan, seeks to retain the services of its
employees, to secure and retain the services of new employees, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
(D) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(A) The Plan shall be administered by the Board of Directors (the "Board")
of the Company unless and until the Board delegates administration to a
committee as provided in subparagraph 2(c). Whether or not the Board has
delegated administration the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(B) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(I) To determine when and how rights to purchase stock of the Company
shall be granted and the provisions of each offering of such rights (which need
not be identical).
(II) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
1
<PAGE>
(III) To construe and interpret the Plan and rights granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan, in a manner and to the extent it shall deem necessary
or expedient to make the Plan fully effective.
(IV) To amend the Plan as provided in paragraph 13.
(V) Generally, to exercise such powers and to perform such acts as
the Board or the Committee deems necessary or expedient to promote the best
interests of the Company and its Affiliates and to carry out the intent that the
Plan be treated as an "employee stock purchase plan" within the meaning of
Section 423 of the Code.
(C) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(A) Subject to the provisions of paragraph 12 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to rights granted under
the Plan shall not exceed in the aggregate two hundred fifty thousand (250,000)
shares of the Company's common stock (the "Common Stock"). If any right granted
under the Plan shall for any reason terminate without having been exercised, the
Common Stock not purchased under such right shall again become available for the
Plan.
(B) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
(A) The Board or the Committee may from time to time grant or provide for
the grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate, which shall comply with the requirements of Section 423(b)(5) of
the Code that all employees granted rights to purchase stock under the Plan
shall have the same rights and privileges. The terms and conditions of an
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance of
the provisions contained in paragraphs 5 through 8, inclusive.
2
<PAGE>
(B) If an employee has more than one right outstanding under the Plan,
unless he or she otherwise indicates in agreements or notices delivered
hereunder: (1) each agreement or notice delivered by that employee will be
deemed to apply to all of his or her rights under the Plan, and (2) a right with
a lower exercise price (or an earlier-granted right, if two rights have
identical exercise prices), will be exercised to the fullest possible extent
before a right with a higher exercise price (or a later-granted right, if two
rights have identical exercise prices) will be exercised.
5. ELIGIBILITY.
(A) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be equal to or greater than
two (2) years. In addition, unless otherwise determined by the Board or the
Committee and set forth in the terms of the applicable Offering, no employee of
the Company or any Affiliate shall be eligible to be granted rights under the
Plan unless, on the Offering Date, such employee's customary employment with the
Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(B) The Board or the Committee may provide that each person who, during
the course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible employee or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(I) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right;
(II) the period of the Offering with respect to such right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(III) the Board or the Committee may provide that if such person first
becomes an eligible employee within a specified period of time before the end of
the Offering, he or she will not receive any right under that Offering.
(C) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of this
subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee, and stock which such
3
<PAGE>
employee may purchase under all outstanding rights and options shall be treated
as stock owned by such employee.
(D) An eligible employee may be granted rights under the Plan only if such
rights, together with any other rights granted under "employee stock purchase
plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of
the Code, do not permit such employee's rights to purchase stock of the Company
or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars
($25,000) of fair market value of such stock (determined at the time such rights
are granted) for each calendar year in which such rights are outstanding at any
time.
(E) Officers of the Company and any designated Affiliate shall be eligible
to participate in Offerings under the Plan, provided, however, that the Board or
the Committee may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(A) On each Offering Date, each eligible employee, pursuant to an Offering
made under the Plan, shall be granted the right to purchase up to the number of
shares of Common Stock of the Company purchasable with a percentage designated
by the Board or the Committee not exceeding fifteen percent (15%) of such
employee's Earnings (as defined by the Board for each Offering) during the
period which begins on the Offering Date (or such later date as the Board or the
Committee determines for a particular Offering) and ends on the date stated in
the Offering, which date shall be no later than the end of the Offering. The
Board or the Committee shall establish one or more dates during an Offering (the
"Purchase Date(s)") on which rights granted under the Plan shall be exercised
and purchases of Common Stock carried out in accordance with such Offering.
(B) In connection with each Offering made under the Plan, the Board or the
Committee may specify a maximum number of shares that may be purchased by any
employee as well as a maximum aggregate number of shares that may be purchased
by all eligible employees pursuant to such Offering. In addition, in connection
with each Offering that contains more than one Purchase Date, the Board or the
Committee may specify a maximum aggregate number of shares which may be
purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(C) The purchase price of stock acquired pursuant to rights granted under
the Plan shall be not less than the lesser of:
(I) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Offering Date; or
(II) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Purchase Date.
4
<PAGE>
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(A) An eligible employee may become a participant in the Plan pursuant to
an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings (as defined
by the Board for each Offering) during the Offering. The payroll deductions made
for each participant shall be credited to an account for such participant under
the Plan and shall be deposited with the general funds of the Company. A
participant may reduce (including to zero) or increase such payroll deductions,
and an eligible employee may begin such payroll deductions, after the beginning
of any Offering only as provided for in the Offering. A participant may make
additional payments into his or her account only if specifically provided for in
the Offering and only if the participant has not had the maximum amount withheld
during the Offering.
(B) At any time during an Offering, a participant may terminate his or her
payroll deductions under the Plan and withdraw from the Offering by delivering
to the Company a notice of withdrawal in such form as the Company provides.
Such withdrawal may be elected at any time prior to the end of the Offering
except as provided by the Board or the Committee in the Offering. Upon such
withdrawal from the Offering by a participant, the Company shall distribute to
such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's right
to acquire Common Stock under that Offering shall be automatically terminated.
A participant's withdrawal from an Offering will have no effect upon such
participant's eligibility to participate in any other Offerings under the Plan
but such participant will be required to deliver a new participation agreement
in order to participate in subsequent Offerings under the Plan.
(C) Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon cessation of a participant's employment with the Company and
any designated Affiliate, for any reason, and the Company shall distribute to
such terminated employee all of his or her accumulated payroll deductions
(reduced to the extent, if any, such deductions have been used to acquire stock
for the terminated employee), under the Offering, without interest.
(D) Rights granted under the Plan shall not be transferable by a
participant other than by will or the laws of descent and distribution, or by a
beneficiary designation as provided in paragraph 14, and during a participant's
lifetime, shall be exercisable only by such participant.
8. EXERCISE.
(A) On each date specified therefor in the relevant Offering ("Purchase
Date"), each participant's accumulated payroll deductions and other additional
payments specifically provided for in the Offering (without any increase for
interest) will be applied to the purchase of whole shares of stock of the
Company, up to the maximum number of shares permitted pursuant to the terms of
the Plan and the applicable Offering, at the purchase price specified in the
Offering. Unless otherwise provided for in the applicable Offering, no
fractional shares shall be issued
5
<PAGE>
upon the exercise of rights granted under the Plan. The amount, if any, of
accumulated payroll deductions remaining in each participant's account after the
purchase of shares which is less than the amount required to purchase one share
of stock on the final Purchase Date of an Offering shall be held in each such
participant's account for the purchase of shares under the next Offering under
the Plan, unless such participant withdraws from such next Offering, as provided
in subparagraph 7(b), or is no longer eligible to be granted rights under the
Plan, as provided in paragraph 5, in which case such amount shall be distributed
to the participant after such final Purchase Date, without interest. The amount,
if any, of accumulated payroll deductions remaining in any participant's account
after the purchase of shares which is equal to the amount required to purchase
whole shares of Common Stock on the final Purchase Date of an Offering shall be
distributed in full to the participant after such Purchase Date, without
interest.
(B) No rights granted under the Plan may be exercised to any extent unless
the shares to be issued upon such exercise under the Plan (including rights
granted thereunder) are covered by an effective registration statement pursuant
to the Securities Act of 1933, as amended (the "Securities Act") and the Plan is
in material compliance with all applicable state, foreign and other securities
and other laws applicable to the Plan. If on a Purchase Date in any Offering
hereunder the Plan is not so registered or in such compliance, no rights granted
under the Plan or any Offering shall be exercised on such Purchase Date, and the
Purchase Date shall be delayed until the Plan is subject to such an effective
registration statement and such compliance, except that the Purchase Date shall
not be delayed more than twelve (12) months and the Purchase Date shall in no
event be more than twenty-seven (27) months from the Offering Date. If on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no rights
granted under the Plan or any Offering shall be exercised then all payroll
deductions accumulated during the Offering (reduced to the extent, if any, such
deductions have been used to acquire stock) shall be distributed to the
participants, without interest.
9. COVENANTS OF THE COMPANY.
(A) During the terms of the rights granted under the Plan, the Company
shall at all times make reasonable efforts to keep available the number of
shares of stock required to satisfy such rights, provided that this section
shall not require the Company to take any action that would result in adverse
tax, accounting or financial consequences to the Company.
(B) The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
6
<PAGE>
Proceeds from the sale of stock to participants pursuant to rights granted
under the Plan shall constitute general funds of the Company.
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shares acquired upon exercise
of rights hereunder are recorded in the books of the Company (or its transfer
agent).
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(A) If any change is made in the stock subject to the Plan, or subject to
any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding rights will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding rights. Such adjustments shall be made by the Board or
the Committee, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company.")
(B) In the event of: (1) a dissolution or liquidation of the Company; (2) a
merger or consolidation in which the Company is not the surviving corporation;
(3) a reverse merger in which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise; or (4) the acquisition by any person, entity or
group within the meaning of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or any comparable successor
provisions (excluding any employee benefit plan, or related trust, sponsored or
maintained by the Company or any Affiliate of the Company) of the beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act,
or comparable successor rule) of securities of the Company representing at least
fifty percent (50%) of the combined voting power entitled to vote in the
election of directors, then, as determined by the Board in its sole discretion
(i) any surviving or acquiring corporation may assume outstanding rights or
substitute similar rights for those under the Plan, (ii) such rights may
continue in full force and effect, or (iii) participants' accumulated payroll
deductions may be used to purchase Common Stock immediately prior to the
transaction described above and the participants' rights under the ongoing
Offering terminated.
13. AMENDMENT OF THE PLAN.
(A) The Board or the Committee at any time, and from time to time, may
amend the Plan. However, except as provided in paragraph 12 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company within twelve (12) months before or
after the adoption of the amendment if such amendment
7
<PAGE>
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code or to comply with the
requirements of Rule 16b-3 promulgated under the Exchange Act.
(B) The Board or the Committee may amend the Plan in any respect the Board
or the Committee deems necessary or advisable to provide eligible employees with
the maximum benefits provided or to be provided under the provisions of the Code
and the regulations promulgated thereunder relating to employee stock purchase
plans and/or to bring the Plan and/or rights granted under it into compliance
therewith.
(C) Rights and obligations under any rights granted before amendment of the
Plan shall not be altered or impaired by any amendment of the Plan, except with
the consent of the person to whom such rights were granted, or except as
necessary to comply with any laws or governmental regulations, or except as
necessary to ensure that the Plan and/or rights granted under the Plan comply
with the requirements of Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(A) A participant may file a written designation of a beneficiary who is to
receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(B) Such designation of beneficiary may be changed by the participant at
any time by written notice in the form prescribed by the Company. In the event
of the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its sole discretion, may deliver such shares and/or cash to the spouse or to
any one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(A) The Board or the Committee in its discretion, may suspend or terminate
the Plan at any time. No rights may be granted under the Plan while the Plan is
suspended or after it is terminated.
(B) Rights and obligations under any rights granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of the person
to whom such rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or rights granted under the Plan comply with the requirements of Section 423
of the Code.
8
<PAGE>
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon the effective date of the initial
public offering of the Common Stock of the Company (the "Effective Date"), but
no rights granted under the Plan shall be exercised unless and until the Plan
has been approved by the stockholders of the Company within twelve (12) months
before or after the date the Plan is adopted by the Board, which date may be
prior to the Effective Date.
9
<PAGE>
CORTELCO SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN OFFERING
ADOPTED APRIL 7, 1999
17. GRANT; OFFERING DATE.
(A) The Board of Directors of Cortelco Systems, Inc. (the "Company"),
pursuant to the Company's 1999 Employee Stock Purchase Plan (the "Plan"), hereby
authorizes the grant of rights to purchase shares of the common stock of the
Company ("Common Stock") to all Eligible Employees (an "Offering"). Subject to
subsection 1(b) below, the first Offering shall begin on the effective date of
the initial public offering of the Company's Common Stock (the "Effective Date")
and shall end on August 31, 2000 (the "Initial Offering"). Thereafter, subject
to subsection 1(b) below, an Offering shall begin on September 1 every year,
beginning on September 1, 2000. An Offering shall end on the day prior to the
first day of the subsequent Offering. The first day of an Offering is that
Offering's "Offering Date." If an Offering Date would fall on a day during which
the Company's Common Stock is not actively traded, then the Offering Date shall
be the next subsequent day during which the Company's Common Stock is actively
traded.
(B) Prior to the commencement of any Offering, the Board of Directors (or
the Committee described in subparagraph 2(c) of the Plan, if any) may change any
or all terms of such Offering and any subsequent Offerings. The granting of
rights pursuant to each Offering hereunder shall occur on each respective
Offering Date unless, prior to such date (a) the Board of Directors (or such
Committee) determines that such Offering shall not occur, or (b) no shares
remain available for issuance under the Plan in connection with the Offering.
18. ELIGIBLE EMPLOYEES.
(A) All employees of the Company and each of its Affiliates (as defined in
the Plan) incorporated in the United States, shall be granted rights to purchase
Common Stock under each Offering on the Offering Date of such Offering, provided
that each such employee otherwise meets the employment requirements of
subparagraph 5(a) of the Plan (an "Eligible Employee"). Notwithstanding the
foregoing, the following employees shall not be Eligible Employees or be granted
rights under an Offering: (i) part-time or seasonal employees whose customary
employment is less than 20 hours per week or 5 months per calendar year or (ii)
5% stockholders (including ownership through unexercised options) described in
subparagraph 5(c) of the Plan.
(B) Each person who first becomes an Eligible Employee during any Offering
will, on the first business day of the month of September or March during the
Offering, which coincides with the day on which such person becomes an Eligible
Employee or which occurs thereafter, receive a right under such Offering, which
right shall thereafter be deemed to be a part of the
10
<PAGE>
Offering. Such right shall have the same characteristics as any rights
originally granted under the Offering except that:
(I) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right; and
(II) the Offering for such right shall begin on its Offering Date and
end coincident with the end of the ongoing Offering.
19. RIGHTS.
(A) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Employee shall be granted the right to purchase the
number of shares of Common Stock purchasable with up to fifteen percent (15%) of
such Eligible Employee's Earnings paid during such Offering after the Eligible
Employee first commences participation; provided, however, that no employee may
purchase Common Stock on a particular Purchase Date that would result in more
than fifteen percent (15%) of such employee's Earnings in the period from the
Offering Date to such Purchase Date having been applied to purchase shares under
all ongoing Offerings under the Plan and all other Company plans intended to
qualify as "employee stock purchase plans" under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). For this Offering, "Earnings"
means the total compensation paid to an employee, including all salary, wages
(including amounts elected to be deferred by the employee, that would otherwise
have been paid, under any cash or deferred arrangement or other deferred
compensation program established by the Company), overtime pay, commissions,
bonuses, and other remuneration paid directly to the employee, but excluding
profit sharing, the cost of employee benefits paid for by the Company, education
or tuition reimbursements, imputed income arising under any Company group
insurance or benefit program, traveling expenses, business and moving expense
reimbursements, income received in connection with stock options, contributions
made by the Company under any employee benefit plan, and similar items of
compensation.
(B) Notwithstanding the foregoing, the maximum number of shares of Common
Stock an Eligible Employee may purchase on a Purchase Date in an Offering is
such number of shares as has a fair market value (determined as of the Offering
Date for such Offering) equal to (x) $25,000 multiplied by the number of
calendar years in which the right under such Offering has been outstanding any
time, minus (y) the fair market value of any other shares of Common Stock
(determined as of the relevant Offering Date with respect to such shares) which,
for purposes of the limitation of Section 423(b)(8) of the Code, are attributed
to any of such calendar years in which the right is outstanding. The amount in
clause (y) of the previous sentence shall be determined in accordance with
regulations under Section 423(b)(8) of the Code based on (i) the number of
shares previously purchased with respect to such calendar years pursuant to such
Offering or any other Offering under the Plan, or pursuant to any other Company
plans intended to qualify as "employee stock purchase plans" under Section 423
of the Code, and (ii) the number of shares subject to other rights outstanding
on the Offering Date for such Offering pursuant to the Plan or any other such
Company plan.
11
<PAGE>
(C) The maximum aggregate number of shares available to be purchased by
all Eligible Employees under an Offering shall be the number of shares remaining
available under the Plan on the Offering Date. If the aggregate purchase of
shares of Common Stock upon exercise of rights granted under the Offering would
exceed the maximum aggregate number of shares available under either of the
limits set forth in this subsection 3(c), the Board shall make a pro rata
allocation of the shares available in a uniform and equitable manner.
20. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Common Stock
on the Offering Date or eighty-five percent (85%) of the fair market value of
the Common Stock on the Purchase Date, in each case rounded up to the nearest
whole cent per share. For the Initial Offering, the fair market value of the
Common Stock at the time when the Offering commences shall be the price per
share at which shares of Common Stock are first sold to the public in the
Company's initial public offering.
21. PARTICIPATION.
(A) Except as otherwise provided in this paragraph 5, an Eligible Employee
may elect to participate in an Offering only at the beginning of the Offering;
provided, however, that a person who first becomes an Eligible Employee during
an Offering may elect to participate at the Offering Date applicable to such
Eligible Employee in accordance with subparagraph 2(b). An Eligible Employee
shall become a participant in an Offering by delivering an agreement authorizing
payroll deductions. Such deductions may be in whole percentages only, with a
minimum percentage of one percent (1%) and maximum percentage of fifteen percent
(15%) of Earnings. A participant may not make additional payments into his or
her account. The agreement shall be made on such enrollment form as the Company
provides, and must be delivered to the Company before the date of participation
to be effective for such Offering, as determined by the Company and communicated
to Eligible Employees. As to the Initial Offering, the time for filing an
enrollment form and commencing participation for individuals who are Eligible
Employees on the Offering Date for the Initial Offering shall be determined by
the Company and communicated to such Eligible Employees.
(B) Generally, a participant may increase or reduce (including to zero)
his or her participation level only as of each September 1 or March 1 during any
Offering (except not during the ten (10) days immediately preceding a Purchase
Date. Any such change in participation shall be made by delivering a notice to
the Company or a designated Affiliate in such form and at such time as the
Company provides. Notwithstanding the foregoing, a participant may reduce his or
her participation level to zero at any time during the course of an Offering
(except not during the ten (10) days immediately preceding a Purchase Date).
Additionally, a participant may withdraw from an Offering and receive his or her
accumulated payroll deductions from the Offering (reduced to the extent, if any,
such deductions have been used to acquire Common Stock for the participant on
any prior Purchase Dates), without interest at any time prior to the end of the
Offering, excluding only each ten (10) day period immediately preceding a
Purchase Date (or such shorter period of time determined by the Company and
12
<PAGE>
communicated to participants), by delivering a withdrawal notice to the Company
in such form as the Company provides. A participant who has withdrawn from an
Offering shall not be entitled to again participate in such Offering, but may
participate in other Offerings under the Plan by submitting a new participation
agreement in accordance with the terms thereof.
22. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the purchase of whole shares of Common Stock, up to the
maximum number of shares permitted under the Plan and the Offering. "Purchase
Date" shall be defined as the last day of each August and of each February.
(Notwithstanding the foregoing sentence, August 31, 1999 under the Initial
Offering shall not be a Purchase Date.) If a Purchase Date would not fall on a
day during which the Company's Common Stock is actively traded, then the
Purchase Date shall be the nearest prior day during which the Company's Common
Stock is actively traded.
23. NOTICES AND AGREEMENTS.
Any notices or agreements provided for in an Offering or the Plan shall be
given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering shall be deemed effectively given upon
receipt or, in the case of notices and agreements delivered by the Company, five
(5) days after deposit in the United States mail, postage prepaid.
24. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the shareholders as required for the Plan to obtain treatment as a tax-
qualified employee stock purchase plan under Section 423 of the Code.
25. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan), the provisions of the Plan
shall control.
13
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EXHIBIT 11.1
CORTELCO SYSTEMS, INC.
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
------------------------------
1996 1997 1998
------------------------------
<S> <C> <C> <C>
In thousands, except per share data
Basic:
Income available to common shareholders......... $ (275) $(2,039) $ (133)
Weighted average share outstanding.............. 3,825 3,825 3,918
------- -------- -------
Basic loss per share............................ $(0.07) $ (0.53) $(0.03)
------- -------- -------
Diluted:
Income available to common shareholders......... $ (275) $(2,039) $ (133)
Interest on convertible debt.................... 55
------- -------- -------
Income available after assumed conversion....... (275) (2,039) (78)
Weighted average shares--basic.................. 3,825 3,825 3,918
Assumed conversion of convertible debt 1,435
------- -------- -------
Weighted average shares--diluted................ 3,825 3,825 5,353
------- -------- -------
Diluted loss per share.......................... $(0.07) $ (0.53) $(0,02)
======= ======== =======
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of Cortelco Systems, Inc.
We consent to the use in this Registration Statement of Cortelco Systems, Inc.
on Form S-1 of our report dated April 9, 1999, appearing in the Prospectus,
which is a part of this Registration Statement, and to the reference to us
under the headings "Selected Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the consolidated financial statement schedule of Cortelco
Systems, Inc. and subsidiaries, listed in Item 16(b). This financial statement
schedule is the responsibility of Cortelco Systems, Inc.'s management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
Memphis, Tennessee
April 23, 1999
<PAGE>
Exhibit 23.2
[LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated September 17, 1996,
relating to the financial statements of Cortelco Puerto Rico, Inc. which
appears in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
April 23, 1999
<PAGE>
Exhibit 23.3
[LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]
Report of Independent Accountants
To the Board of Directors and
Stockholders of
Cortelco Puerto Rico, Inc.
In our opinion, the statements of income and cash flows of Cortelco Puerto
Rico, Inc. for the year ended July 31, 1996 (not presented separately herein)
present fairly, in all material respects, the results of its operations and its
cash flows for the year ended July 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. We have not
audited the financial statements of Cortelco Puerto Rico, Inc. for any period
subsequent to July 31, 1996.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
September 17, 1996
Stamp 1392003 of the P.R. Society of
Certified Public Accountants has been
Affixed to the file copy of this report
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITOR'S CONSENT
- -----------------------------
We consent to the use in this Registration Statement of Cortelco Systems, Inc.
on Form S-1 of our report on the financial statements of BCS Technologies, Inc.,
dated March 5, 1999, appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Experts" in such
Prospectus.
/s/ BROCK AND COMPANY, CPAs, P.C.
-------------------------------------------
BROCK AND COMPANY, CPAs, P.C.
Certified Public Accountants
Littleton, Colorado
April 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1998
<PERIOD-START> AUG-01-1998 AUG-01-1997
<PERIOD-END> JAN-31-1999 JUL-31-1998
<CASH> 160 126
<SECURITIES> 0 0
<RECEIVABLES> 11,820 8,829
<ALLOWANCES> (2,101) (1720)
<INVENTORY> 5,386 6,256
<CURRENT-ASSETS> 16,226 14,712
<PP&E> 2,386 2,046
<DEPRECIATION> (950) (729)
<TOTAL-ASSETS> 19,590 17,835
<CURRENT-LIABILITIES> 13,737 (12,383)
<BONDS> 0 0
0 0
0 0
<COMMON> (4) (1,178)
<OTHER-SE> (613) 2,300
<TOTAL-LIABILITY-AND-EQUITY> (19,590) (17,835)
<SALES> (17,482) (30,949)
<TOTAL-REVENUES> (17,482) (30,949)
<CGS> 10,307 18,504
<TOTAL-COSTS> 6,154 11,452
<OTHER-EXPENSES> 20 61
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 412 826
<INCOME-PRETAX> 589 79
<INCOME-TAX> 70 54
<INCOME-CONTINUING> 519 133
<DISCONTINUED> 0 0
<EXTRAORDINARY> 6 54
<CHANGES> 0 0
<NET-INCOME> 513 133
<EPS-PRIMARY> .13 .03
<EPS-DILUTED> .10 .03
</TABLE>
