United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number: 0-9023
COMDIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2443673
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P. O. Box 7266
1180 Seminole Trail; Charlottesville, Virginia 22906-7266
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(804) 978-2200
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of Common Stock, as of latest practicable date.
8,814,634 common shares as of June 28, 1998.
COMDIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets as of
June 28, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the Three and Six Months ended
June 28, 1998 and June 29, 1997 4
Consolidated Statements of Cash Flows
for the Six Months ended
June 28, 1998 and June 29, 1997 5
Notes to Consolidated Financial Statements 6-11
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K 19
COMDIAL CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - (Unaudited)
June 28, Dec. 31,
In thousands except par value 1998 1997 *
Assets
Current assets
Cash and cash equivalents $336 $5,673
Accounts receivable - net 16,581 11,278
Inventories 17,279 18,487
Prepaid expenses and other current assets 1,942 1,669
Total current assets 36,138 37,107
Property - net 16,353 16,334
Goodwill 12,294 13,142
Deferred tax asset - net 8,247 8,164
Other assets 5,697 4,517
Total assets $78,729 $79,264
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $7,934 $9,229
Accrued payroll and related expenses 3,312 2,659
Accrued promotional allowances 1,632 1,915
Other accrued liabilities 2,342 2,927
Current maturities of debt 5,651 3,701
Total current liabilities 20,871 20,431
Long-term debt 4,544 9,922
Deferred tax liability 2,459 2,705
Other long-term liabilities 1,430 1,371
Commitments and contingent liabilities - -
Total liabilities 29,304 34,429
Stockholders' equity
Common stock ($0.01 par value) and paid-in
capital (Authorized 30,000 shares; issued
shares: 1998 = 8,815; 1997 = 8,697) 115,755 114,663
Other (1,238) (1,039)
Accumulated deficit (65,092) (68,789)
Total stockholders' equity 49,425 44,835
Total liabilities and stockholders' equity $78,729 $79,264
The accompanying notes are an integral part of these financial statements.
COMDIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations - (Unaudited)
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
In thousands except per share amounts 1998 1997 1998 1997
Net sales $31,317 $29,400 $60,598 $56,234
Cost of goods sold 19,101 17,628 36,495 33,424
Gross profit 12,216 11,772 24,103 22,810
Operating expenses
Selling, general & administrative 7,545 7,445 15,160 14,643
Engineering, research & development 1,493 1,683 3,044 3,286
Operating income 3,178 2,644 5,899 4,881
Other expense
Interest expense 273 449 548 876
Goodwill amortization expense 683 859 1,346 1,896
Miscellaneous expenses - net 14 90 194 303
Income before income taxes 2,208 1,246 3,811 1,806
Income tax expense (benefit) 350 104 114 (7)
Net income applicable to common stock $1,858 $1,142 $3,697 $1,813
Earnings per common share and common equivalent share:
Basic $0.21 $0.13 $0.42 $0.21
Diluted $0.20 $0.13 $0.41 $0.21
Weighted average common shares outstanding:
Basic 8,810 8,656 8,762 8,620
Diluted 9,125 8,784 9,037 8,685
The accompanying notes are an integral part of these financial statements.
COMDIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows - (Unaudited)
Six Months Ended
June 28, June 29,
In thousands 1998 1997
Cash flows from operating activities:
Cash received from customers $58,147 $56,014
Other cash received 493 506
Interest received 28 4
Cash paid to suppliers and employees (57,831) (53,510)
Interest paid on debt (772) (1,072)
Interest paid under capital lease obligations (13) (8)
Income taxes paid (426) (202)
Net cash provided by (used in) operating activities (374) 1,732
Cash flows from investing activities:
Acquisition costs for KVT and Aurora (4) (1)
Proceeds received for the sale of FastCall 178 -
Proceeds from the sale of equipment 100 -
Capital expenditures (2,057) (2,718)
Net cash used in investing activities (1,783) (2,719)
Cash flows from financing activities:
Proceeds from borrowings - 1,900
Net borrowings under revolver agreement 2,500 1,523
Proceeds from issuance of common stock 248 4
Principal payments on debt (5,893) (2,482)
Principal payments under capital lease obligations (35) (53)
Net cash provided by (used in) financing activities (3,180) 892
Net decrease in cash and cash equivalents (5,337) (95)
Cash and cash equivalents at beginning of year 5,673 180
Cash and cash equivalents at end of period $336 $85
Reconciliation of net income to net cash provided by (used in)
operating activities:
Net income $3,697 $1,813
Depreciation and amortization 3,734 4,433
Increase in accounts receivable (5,303) (2,313)
Inventory provision 1,293 2,079
Increase in inventory (85) (2,382)
Increase in other assets (2,578) (1,069)
Increase in deferred tax asset (330) (220)
Increase (decrease) in accounts payable (1,295) 20
Decrease in other liabilities (156) (726)
Increase in paid-in capital and other equity 649 97
Total adjustments (4,071) (81)
Net cash provided by (used in) operating activities ($374) $1,732
The accompanying notes are an integral part of these financial statements.
COMDIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 28, 1998 - (Unaudited)
Note A: CONSOLIDATED FINANCIAL STATEMENTS_______________________
The financial information included as of June 28, 1998, and for
the three and six months ended June 28, 1998 and June 29, 1997 is
unaudited. The financial information reflects all normal recurring
adjustments, except for Statement of Financial Accounting Standards
("SFAS") No. 109 adjustments, which are, in the opinion of
management, necessary for a fair statement of results for such
periods. Accounting policies followed by Comdial Corporation (the
"Company") are described in Note 1 to the consolidated financial
statements in its Annual Report to Stockholders for the year ended
December 31, 1997. The consolidated financial statements for 1998
contained herein should be read in conjunction with the 1997
financial statements, including notes thereto, contained in the
Company's Annual Report to Stockholders for the year ended December
31, 1997. Certain amounts in the 1997 consolidated financial
statements have been reclassified to conform to the 1998
presentation. The results of operations for the six months ended
June 28, 1998, are not necessarily indicative of results for the
full year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Note B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES______________
The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires
management to make certain estimates and assumptions that affect
reported amounts of assets, liabilities, revenues, and expenses.
GAAP also requires disclosure of contingent assets and liabilities
as of June 28, 1998. Actual results may differ from those
estimates.
Cash and cash equivalents are defined as short-term liquid
investments that are readily convertible into cash with maturities,
when purchased, of less than 90 days. Under the Company's current
cash management policy, borrowings from the revolving credit
facility are used for operating purposes. The revolving credit
facility is reduced by cash receipts that are deposited daily.
Bank overdrafts of $2.0 million and $1.9 million are included in
accounts payable at June 28, 1998 and December 31, 1997,
respectively. Bank overdrafts consist of outstanding checks that
have not (1) cleared the bank and (2) been funded by the revolving
credit facility (see Note D). The Company considers the
outstanding checks to be a bank overdraft. The Company reports
revolving credit facility activity on a net basis in the
Consolidated Statements of Cash Flows.
Note C: INVENTORIES_____________________________________________
Inventories consist of the following:
_________________________________________________________________
June 28, Dec. 31,
In thousands 1998 1997
Finished goods $7,958 $6,336
Work-in-process 3,067 4,101
Materials and supplies 6,254 8,050
Total $17,279 $18,487
_________________________________________________________________
Note D: BORROWINGS______________________________________________
Since February 1, 1994, Fleet Capital Corporation ("Fleet") has
held substantially all of the Company's indebtedness.
Long-term Debt. Long-term debt consists of the following:
_________________________________________________________________
June 28, Dec. 31,
In thousands 1998 1997
Loans payable to Fleet
Acquisition loan (1) $2,843 $5,543
Equipment loan I (2) - 139
Equipment loan II (3) - 1,647
Revolving credit (4) 2,500 -
Promissory note (5) 4,200 5,600
Other debt (6) 610 617
Capitalized leases (7) ____42 ____77
Total debt 10,195 13,623
Less current maturities on debt 5,651 3,701
Total long-term debt $4,544 $9,922
_________________________________________________________________
In 1994, the Company and Fleet entered into a loan and
security agreement (the "Loan Agreement") which has been amended
from time to time. The Loan Agreement provides the Company with a
$10.0 million acquisition loan (the "Acquisition Loan"), a $3.5
million equipment loan (the "Equipment Loan"), and a $12.5 million
revolving credit loan facility (the "Revolver").
(1) On March 20, 1996, the Company borrowed $8.5 million under
the Acquisition Loan which was used to acquire Aurora Systems, Inc.
("Aurora") and Key Voice Technologies ("KVT"). The Acquisition
Loan is payable in equal monthly principal installments of
$142,142, with the balance due on February 1, 2001. In 1998, the
Company has paid an additional $1.8 million against the Acquisition
Loan along with the required monthly payments. Based on the
present monthly principal payment; the loan balance should be paid
in full by February 2000. The original final payment was scheduled
for February 2001.
(2) Equipment Loan I was payable in equal monthly principal
installments of $27,000, with the balance due on June 1, 1998.
(3) Equipment Loan II was payable in equal monthly principal
installments of $31,667, with the balance due on February 1, 2001.
In January 1998, the Company paid the remaining balances of
both Equipment Loan I and II of $1,786,000.
(4) Availability under the Revolver of up to $12.5 million is
based on eligible accounts receivable and inventory, less funds
already borrowed.
Loans made pursuant to the Loan Agreement bear interest rates
at either Fleet's prime rate or the London Interbank Offered Rate
("LIBOR") at the Company's option. The interest rates can be
adjusted annually based on the Company's debt to earnings ratio,
which allow the rates to vary from minus 0.50% to plus 0.50% under
or above Fleet's prime rate and from plus 1.50% to 2.50% above
LIBOR. As of June 28, 1998, Fleet's prime interest rate was 8.50%
and LIBOR rates were 5.65% and 5.66% with approximately 94% of the
loans based on LIBOR. As of June 28, 1998, the Company's borrowing
rate for loans based on prime was 8.00% and the LIBOR rates were
approximately 7.15% and 7.16%, respectively. For December 31,
1997, the Company's borrowing rate for loans based on the prime and
LIBOR rates were 9.00% and 8.47%, respectively, with approximately
96% of the loans based on LIBOR.
(5) The Company's promissory note (the "Promissory Note"),
which was issued in connection with the purchase of KVT, carries an
interest rate equal to the prime rate with annual payments of $1.4
million plus accumulated interest payments with the balance due on
March 20, 2001. As of June 28, 1998 and December 31, 1997, the
interest rate on the Promissory Note was 8.50%.
(6) Other debt consists of a mortgage acquired in conjunction
with the acquisition of KVT and another mortgage entered into by
KVT in order to acquire an adjacent building for expansion. The
mortgages require monthly payments of $2,817 and $2,869, including
interest at fixed rates of 8.75% and 9.125%, respectively. Final
payments are due on August 1, 2005 and June 27, 2007, respectively.
(7) Capital leases are with various financing entities and are
payable based on the terms of each individual lease.
Scheduled maturities of current and long-term debt for the
Fleet Notes (as defined in the Loan Agreement), the Promissory
Note, and other debt (excluding the Revolver and leasing agreements
of $2,542,000) are as follows:
_________________________________________________________________
Principal
In thousands Fiscal Years Installments______
Notes payable 1998 * $863
1999 3,121
2000 1,700
2001 1,418
2002 19
2003 21
Beyond 2003 511
Total $7,653
* The remaining aggregate for 1998.
_________________________________________________________________
Debt Covenants
The Company's indebtedness to Fleet is secured by liens on the
Company's accounts receivable, inventories, intangibles, land, and
other property. Among other restrictions, the Loan Agreement with
Fleet also contains certain financial covenants that relate to
specified levels of consolidated tangible net worth, profitability,
and other financial ratios. The Loan Agreement also contains
certain limits on additional borrowings.
On March 13, 1998 and June 24, 1998, the Company and Fleet
amended the Loan Agreement to modify and eliminate certain
covenants. As of June 28, 1998, the Company is in compliance with
all the covenants and terms of the Loan Agreement.
Note E: EARNINGS PER SHARE______________________________________
For the three and six months ending June 28, 1998 and June 29,
1997, earnings per common share ("EPS") were computed for both
basic and diluted EPS to conform to Statement of Financial
Accounting Standards ("SFAS") No. 128. Basic EPS for the three and
six months presented were computed by dividing net income
applicable to common shares by the weighted average number of
common shares outstanding and common equivalent shares including
any possible contingent shares. For the three and six months
ending June 28, 1998 and June 29, 1997, diluted EPS were computed
by dividing income attributable to common shareholders by the
weighted average number of common and common equivalent shares
outstanding during the period plus (in periods in which they had a
dilutive effect) the effect of common shares contingently issuable,
primarily from stock options.
Note F: INCOME TAXES____________________________________________
The components of the income tax expense (benefit) based on the
liability method for the six months are as follows:
_________________________________________________________________
June 28, June 29,
In thousands 1998 1997
Current - Federal $245 $100
State 199 112
Deferred - Federal (322) (214)
State (8) (5)
Income tax expense (benefit) $114 ($7)
_________________________________________________________________
The income tax provision reconciled to the tax computed at
statutory rates for the six months are summarized as follows:
_________________________________________________________________
June 28, June 29,
In thousands 1998 1997
Federal tax at statutory
rate (35% in 1998 and 1997) $1,334 $632
State income taxes (net of federal
tax benefit) 129 73
Nondeductible charges 66 193
Alternative minimum tax 164 56
Utilization of operating loss carryover (1,249) (742)
Adjustment of valuation allowance (330) (219)
Income tax expense (benefit) $114 ($7)
_________________________________________________________________
Net deferred tax assets of $5.8 million and $5.5 million have
been recognized in the accompanying Consolidated Balance Sheets at
June 28, 1998 and December 31, 1997, respectively. The components
of the net deferred tax assets are as follows:
_________________________________________________________________
June 28, Dec. 31,
In thousands 1998 1997
Total deferred tax assets $21,229 $25,201
Total valuation allowance (12,982) (17,037)
Total deferred tax asset - net 8,247 8,164
Total deferred tax liabilities (2,459) (2,705)
Total net deferred tax asset $5,788 $5,459
_________________________________________________________________
The valuation allowance decreased by $4.1 million during the
six month period ended June 28, 1998. This reduction was primarily
related to the re-evaluation of the future utilization of deferred
tax assets of $330,000, and the utilization of deferred tax assets
and liabilities and net operating loss carryforwards ("NOLs") of
$3.7 million. The Company periodically reviews the requirements
for a valuation allowance and makes adjustments to such allowance
when changes in circumstances result in changes in management's
judgment about the future realization of deferred tax assets.
Based on a continual evaluation of the realization of the deferred
tax assets, the valuation allowance was reduced and a net tax
benefit of $330,000 was recognized in the first quarter ended March
29, 1998. Management believes that it is more likely than not that
the Company will realize these tax benefits. However, the tax
benefits could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced.
The Company has NOLs and tax credit carryovers of approximately
$43.6 million and $2.9 million, respectively. If not utilized, the
NOLs and tax credit carryovers will expire in various years through
2010.
Based on the Company's interpretation of Section 382 of the
Internal Revenue Code, the determination of the valuation allowance
was calculated assuming a 50% ownership change, which could limit
the utilization of the tax net operating loss and tax credit
carryforwards in future periods starting at the time of the change.
An ownership change could occur if changes in the Company's stock
ownership exceeds 50% of the value of the Company's stock during a
three year look back period.
Note G: SUBSEQUENT EVENT _________________________________________
On July 14, 1998, the Company acquired the internet telephony
gateway product VOIP.gate.com and the related assets and business
of Array Telecom Inc. ("ATI") and Array Systems Computing Inc.
("ASCI"). The purchase price was approximately $5.9 million. The
funds used for the acquisition came from cash generated by
operations and the Revolving Credit Facility. Comdial expects to
take a one-time charge against earnings of approximately $4.7
million for the portion of the purchase price that relates to in-
process research and development. The Company also expects
interest expense to increase slightly when compared to previous
quarters in 1998.
The principle asset purchased was the intellectual property
associated with VOIPgate.com software, an internet protocol ("IP")
based telephony software platform. The Company also entered into
a Technical Service Agreement with ASCI to continue ongoing product
development programs for approximately nine months.
COMDIAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist the reader in
understanding and evaluating the financial condition and results of
operations of Comdial Corporation and its subsidiaries (the
"Company"). This review should be read in conjunction with the
consolidated financial statements and accompanying notes. This
analysis attempts to identify trends and material changes that
occurred during the periods presented. Prior years have been
reclassified to conform to the 1998 reporting basis (see Note A to
the Consolidated Financial Statements).
The Company is a Delaware corporation based in Charlottesville,
Virginia. The Company was originally incorporated in Oregon in
1977 and was reincorporated in Delaware in 1982. The Company's
Common Stock is traded over-the-counter and is quoted on the
National Association of Security Dealers Automated Quotation
National Market System ("Nasdaq National Market") under the symbol
"CMDL."
Results of Operations
Revenue and Earnings
Second Quarter 1998 vs. 1997
The Company's net income increased by 63% for the second
quarter of 1998 to $1.9 million when compared with $1.1 million for
the same period in 1997. Income before income taxes for the second
quarter of 1998 increased by 77% to $2.2 million as compared with
$1.2 million for the comparable period in 1997.
Net sales increased by 7% for the second quarter of 1998 to
$31.3 million, compared with $29.4 million in the second quarter of
1997. Digital, Digital Expandable ("DXP"), and computer-telephony
integration ("CTI") product sales increased, but were offset
slightly with a drop in sales of analog, proprietary and specialty
terminals, and custom manufactured products.
Gross profit increased by 4% for the second quarter of 1998
to $12.2 million, compared with $11.8 million in the second
quarter of 1997. Gross profit as a percentage of sales dropped
slightly from 40% in 1997 to 39% for 1998.
Engineering, research and development expenses decreased by 11%
for the second quarter of 1998 to $1.5 million, compared with $1.7
million in the second quarter of 1997. This decrease was primarily
attributable to the decrease in engineering personnel at Aurora
Systems, Inc. ("Aurora"), a subsidiary of the Company.
Interest expense decreased by 39% for the second quarter of
1998 to $273,000, compared with $449,000 in the second quarter of
1997. This decrease is due to lower average debt levels with Fleet
Capital Corporation ("Fleet"). In first quarter of 1998, the
Company paid an additional $3.5 million against its debt with Fleet
(see Note D to the Consolidated Financial Statements).
Goodwill amortization expense decreased for the second quarter
of 1998 by 20% to $683,000, compared with $859,000 for the second
quarter of 1997. This decrease is due to the full amortization of
certain goodwill costs associated with the Aurora acquisition.
Income tax expense increased in the second quarter of 1998 to
$350,000 compared with $104,000 for the second quarter of 1997.
This increase is primarily due to tax planning by the Company
maximizing the utilization of net operating losses ("NOLs") by
deferring tax deductible expenses into future periods.
Six Months of 1998 vs. 1997
The Company's net income increased by 104% for the first six
months of 1998 to $3.7 million when compared with $1.8 million for
the same period in 1997. Income before income taxes for the first
half of 1998 increased by 111% to $3.8 million as compared with
$1.8 million for the same period in 1997.
Net sales increased by 8% for the first six months of 1998 to
$60.6 million, compared with $56.2 million for the same period of
1997. Digital, DXP, and CTI product sales increased substantially
but were offset slightly with a drop in sales of analog,
proprietary and specialty terminals, and custom manufactured
products.
The following table presents certain relevant net sales
information concerning the Company's principal product lines for
the first six months of 1998 and 1997.
_____________________________________________________________________
June 28, June 29,
In thousands 1998 1997
Sales
Business Systems
Digital $26,587 $22,712
CTI 16,535 15,303
DXP 12,050 10,152
Analog 4,254 6,032
Sub-total 59,426 54,199
Proprietary and Specialty Terminals 1,651 2,279
Custom Manufacturing 133 404
Gross Sales 61,210 56,882
Sales discount and allowances 612 648
Net Sales $60,598 $56,234
____________________________________________________________________
Gross profit increased by 6% for the first six months of 1998
to $24.1 million, compared with $22.8 million for the same period
of 1997. Gross profit as a percentage of sales decreased from 41%
in 1997 to 40% in 1998. This slight decrease is primarily due to
the Company's efforts to reduce inventory.
Selling, general and administrative expenses increased by 4%
for the first six months of 1998 to $15.2 million, compared with
$14.6 million for the same period of 1997. This increase was
primarily attributable to the increase in sales personnel to
support the growth of sales in service application environments and
national accounts, and to further improve customer training and
support.
Engineering, research and development expenses decreased by 7%
for the first six months of 1998 to $3.0 million, compared with
$3.3 million for the same period of 1997. This decrease was
primarily attributable to the decrease in engineering personnel at
Aurora.
Interest expense decreased by 37% for the first six months of
1998 to $548,000, compared with $876,000 for the same period of
1997. This decrease is due to lower average debt levels with
Fleet.
Goodwill amortization expense decreased for the first six
months of 1998 by 29% to $1.3 million, compared with $1.9 million
for the same period of 1997. This decrease is due to the full
amortization of certain goodwill costs in prior periods associated
with the Aurora acquisition.
Income tax expense (benefit) increased in the first six months
of 1998 to $114,000 compared with a net benefit of ($7,000) for the
same period of 1997. This increase is primarily due to tax planning
by the Company maximizing the utilization of NOLs by deferring tax
deductible expenses into future periods.
Liquidity
Fleet holds substantially all of the Company's indebtedness.
The Company and Fleet entered into a loan and security agreement
(the "Loan Agreement") on February 1, 1994, which has been amended
from time to time. Under the Loan Agreement, Fleet provided a
$10.0 million acquisition loan (the "Acquisition Loan"), $3.5
million equipment loan (the "Equipment Loan"), and $12.5 million
revolving credit loan facility (the "Revolver"). For more detailed
information concerning the Company's debt refer to Note D to the
Consolidated Financial Statements.
The Acquisition Loan is payable in equal monthly principal
installments of $142,142, with the balance due on February 1, 2001.
In January 1998, the Company paid Equipment Loans I and II in
full in the amount of $1,786,000.
At the Company's option, the Acquisition Loan, Equipment Loans,
and Revolver bear interest at rates based on either Fleet's prime
rate or the London Interbank Offered Rate ("LIBOR"). The interest
rates can be adjusted annually based on the Company's debt to
earnings ratio which will allow the rates to vary from minus 0.50%
to plus 0.50% of Fleet's prime rate and from plus 1.50% to 2.50%
above LIBOR. As of June 28, 1998 and December 31, 1997, the prime
interest rate was 8.50%. The LIBOR rates as of June 28, 1998, were
5.65% and 5.66% with approximately 94% of the loans based on LIBOR.
The LIBOR rate as of December 31, 1997, was 5.97% with
approximately 96% of the loans based on LIBOR. As of June 28,
1998, the Company's borrowing rate for prime was 8.00%, and the
LIBOR borrowing rates were 7.15% and 7.16%.
Availability under the Revolver is based on eligible accounts
receivable and inventory, less funds already borrowed.
The Company's indebtedness to Fleet is secured by liens on
substantially all of the Company's assets. The Loan Agreement
contains certain financial covenant. The Company is currently in
compliance with all the covenants and terms of the amended Loan
Agreement.
The Company's Promissory Note of $7.0 million, which was issued
in connection with the purchase of Key Voice Technologies ("KVT"),
a subsidiary of the Company, carries an interest rate based on
prime. The Promissory Note is paid annually in the principal
amount of $1.4 million plus unpaid interest with the final payment
due on March 20, 2001.
Capital leases are with various financing facilities which are
payable based on the terms of each individual lease. Other debt
consists of two mortgages pertaining to KVT. The two mortgages
have monthly payments of $2,817 and $2,869, which includes interest
at 8.75% and 9.13%, respectively. The final payments are due on
August 01, 2005 and June 27, 2007, respectively.
The following table sets forth the Company's cash and cash
equivalents, current maturities on debt and working capital at
the dates indicated.
_____________________________________________________________________
June 28, Dec. 31,
In thousands 1998 1997
Cash and cash equivalents $336 $5,673
Current maturities on debt 5,651 3,701
Working capital 15,267 16,676
_________________________________________________________________
All operating cash requirements are currently being funded
through the Revolver. Cash decreased primarily due to the
additional payment made in January 1998 of $3.5 million against the
Company's debt to Fleet. Current maturities on debt increased
primarily due to the increase in the Revolver of $2.5 million,
which was slightly offset by the repayment of amounts outstanding
under the Equipment Loans in January 1998 when compared to December
31, 1997. Working capital decreased by $1.4 million primarily due
to the decrease in cash which was a direct result of the additional
debt reduction.
Accounts receivable increased at the end of the second quarter
of 1998 by 47% or $5.3 million, compared with December 31, 1997.
This increase was primarily due to increased sales and the timing
of related shipments.
Other assets, increased at the end of the second quarter of
1998 by 26% or 1.2 million, compared with December 31, 1997. This
increase is primarily attributable to the continued software
development costs associated with new products as well as feature
improvements for existing products.
Accrued payroll and related expenses increased at the end of
the second quarter of 1998 by 25% or $653,000, compared with
December 31, 1997. This increase is primarily attributable to a
higher payroll accrual, which due primarily to the timing of the
bi-weekly payroll.
Other promotional allowances decreased at the end of the second
quarter of 1998 by 15% or $283,000, compared with December 31,
1997. This decrease is due primarily to the payment of volume
discounts by the Company for 1997.
During the six month periods ended June 28, 1998 and June 29,
1997, all of the Company's sales, net income, and identifiable net
assets were attributable to the telecommunications industry except
sales relating to custom manufacturing.
Capital Resources
Capital additions in the first six months of 1998 and for the
comparable period of 1997 were $1.5 million and $2.7 million,
respectively. The Company anticipates spending approximately $5.0
million on capital additions for fiscal year 1998, which includes
equipment for manufacturing and advanced technology.
Cash expenditures for capital additions for the first six
months of 1998 and for the comparable period of 1997 were $2.1
million and $2.7 million, respectively. Capital expenditures for
1998 and 1997 were provided by funds from operations and borrowings
from Fleet. The Company plans to fund all future capital additions
through funds from operations, working capital from Fleet, and
long-term lease arrangements. Management expects these sources to
provide the capital assets necessary for near-term future
operations and future product development.
The Company has a commitment from Crestar Bank for the issuance
of letters of credit in an aggregate amount not to exceed $500,000
at any one time. At June 28, 1998, the amount of available
commitments under the letter of credit facility with Crestar Bank
was $250,000.
Other Financial Information
In early 1997, the Company established a team of people, to
evaluate whether, and to what extent, the Year 2000 issue would
impact the Company's business. The Year 2000 Team identified which
of the Company's products, devices, and computerized systems
contain embedded microprocessors that require remediation or
replacement because of potential Year 2000 problems. The Year 2000
Team concluded that nearly all of the Company's products are
already Year 2000 compliant and those which are not will be
compliant by 1999 or before. On an ongoing basis, the Company has
been replacing existing in-house systems to improve efficiency and
to address the Year 2000 issue. Such replacements are projected to
be complete in the second half of 1998. The Company does not
expect to make any material expenditures solely to address Year
2000 issues.
Management believes that the Company is properly addressing the
Year 2000 issue in order to mitigate any adverse operational or
financial impacts. Furthermore, the Company has implemented a
requirement that its suppliers certify that all products and
supplier's purchased products provided to the Company will not be
adversely affected by the Year 2000. Also, all services provided
to the Company by suppliers will not be affected or hindered in
anyway. Absent such certification or corrective action, the
Company will use alternative vendors.
In February 1997, Financial Accounting Standards Board ("FASB")
issued of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." The new standard requires dual presentation
of both basic and diluted earnings per share ("EPS") on the face of
the earnings statement and requires a reconciliation of both basic
and diluted EPS calculations. This statement was effective for
financial statements for both interim and annual periods ending
after December 15, 1997.
In June 1997, FASB issued SFAS No. 130, "Reporting
Comprehensive Income." The new standard requires businesses to
disclose comprehensive income and its components in their general-
purpose financial statements. This statement will be effective for
the Company's 1998 fiscal year. This standard will not have an
impact on the Company's disclosures.
In February 1997, FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The new
standard requires presentation disclosures about reportable
operating segments of the Company. This statement will be
effective for the Company's 1998 fiscal year. This new requirement
is being considered by management to determine how best to meet
this new disclosure requirement.
In April 1998, FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
new standard revises the required disclosures for employee benefit
plans, but it does not change the measurement or recognition of
such plans. This statement will be effective for the Company's
1998 fiscal year.
"Safe Harbor" Statement Under The Private Securities Litigation
Reform Act Of 1995
The Company's Form 10-Q may contain forward-looking statements
that are subject to risks and uncertainties, including, but not
limited to, the impact of competitive products, product demand and
market acceptance risks, reliance on key strategic alliances,
fluctuations in operating results, delays in development of highly
complex products, and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission.
These risks could cause the Company's actual results for 1998 and
beyond to differ materially from those expressed in any forward-
looking statement made by, or on behalf of, the Company.
COMDIAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a)
3. Exhibits Included herein:
(10) Material Contracts:
10.1 Amendment No. 6 to the Loan and Security Agreement
dated June 24, 1998 among the Registrant and Fleet
Capital Corporation.
10.2 Asset Purchase Agreement dated July 14, 1998 among
the Registrant and Array Telecom Inc. and Array
Systems Computing Inc.
(11) Statement re Computation of Per Share Earnings.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant has not filed any reports on Form 8-K
during the quarterly period.
__________________
Items not listed if not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Comdial Corporation
(Registrant)
Date: August 10, 1998 By: /s/ Christian L. Becken
Christian L. Becken
Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary
AMENDMENT NO. 6
EXHIBIT 10.1
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 6 TO LOAN AND SECURITY AGREEMENT
("Amendment"), dated the 24th day of June, 1998, made by and between
FLEET CAPITAL CORPORATION (formerly known as Shawmut Capital
Corporation and successor by assignment from Barclays Business Credit, Inc.),
a Rhode Island corporation (the "Lender"); and
COMDIAL CORPORATION ("Parent") and its wholly-owned subsidiaries
AMERICAN TELECOMMUNICATIONS CORPORATION ("ATC"), AMERICAN
PHONE CENTERS, INC. ("APC"), COMDIAL ENTERPRISE SYSTEMS, INC. ("CES"),
COMDIAL TELECOMMUNICATIONS INTERNATIONAL, INC. ("CTII"), TELECOM
TECHNOLOGIES CORPORATION (f/k/a Scott Technologies Corporation) ("STC"),
COMDIAL CUSTOM MANUFACTURING, INC. ("CCM"), COMDIAL VIDEO
TELEPHONY, INC. ("CVT"), COMDIAL TECHNOLOGY CORPORATION ("CTC"),
COMDIAL TELECOMMUNICATIONS, INC. ("CTI"), AURORA SYSTEMS, INC.
("ASI"), KEY VOICE TECHNOLOGIES, INC. ("KVTI"), and CTI's wholly-owned
subsidiaries, COMDIAL BUSINESS COMMUNICATIONS CORPORATION ("CBCC"),
and COMDIAL CONSUMER COMMUNICATIONS CORPORATION ("CCCC"; Parent,
ATC, APC, CES, CTII, STC, CCM, CVT, CTC, CTI, ASI, KVTI, CBCC and CCCC being
hereinafter referred to collectively as the "Borrowers" and, individually,
as a "Borrower"), each a Delaware corporation,to the Loan and Security
Agreement, dated February 1, 1994 (as amended, modified, restated or
supplemented from time to time, the "Loan Agreement"). All capitalized terms
used herein without definition shall have the meanings ascribed to such terms
in the Loan Agreement.
RECITALS
A. Pursuant to the Loan Agreement, the Lender has agreed to make
loans and extend credit to the Borrowers secured by the Collateral and the
Realty.
B. The Loan Agreement was previously amended by a certain
Consolidated Amendment No. 1 thereto, dated March 13, 1996, a certain Amendment
No. 2 thereto, dated June 28, 1996, and a certain Amendment No. 3 thereto,
dated September 27, 1996, a certain Amendment No. 4 thereto, dated March 27,
1997, and a certain Amendment No. 5 thereto, dated March 13, 1998.
C. The Borrowers and the Lender now desire to further amend the
Loan Agreement as set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
expressly acknowledged, the Borrowers and the Lender hereby agree as follows:
ARTICLE I
AMENDMENTS TO LOAN AGREEMENT
The Loan Agreement is hereby amended as follows:
1.1. Minimum Consolidated Adjusted Tangible Net Worth. Section
9.3(A) is amended in its entirety to read as follows:
"(A) Minimum Consolidated Adjusted Tangible Net Worth. Maintain a
Consolidated Adjusted Tangible Net Worth of not less than the amount shown
below at all times during the period corresponding thereto:
Consolidated Adjusted
Period Tangible Net Worth
Second fiscal quarter of fiscal year $27,500,000
ending December 31, 1998
Third fiscal quarter of fiscal year $30,500,000
ending December 31, 1998
Fourth fiscal quarter of fiscal year $32,000,000
ending December 31, 1998
Fourth fiscal quarter of fiscal year $32,750,000
ending December 31, 1999 and at all
times thereafter
1.2 Profitability. Section 9.3(B) is amended in its entirety to
read as follows:
"(B) Profitability. Achieve a Consolidated Adjusted Earnings From
Operations of not less than the amount shown below for the period corresponding
thereto:
Consolidated Adjusted
Period Earnings From Operations
First and second fiscal quarters of ($3,500,000)
fiscal year ending December 31, 1998
First, second and third fiscal quarters ($1,500,000)
of fiscal year ending December 31, 1998
Fiscal year ending December 31, 1998 $ 500,000
First fiscal quarter of fiscal year ending $ 250,000
December 31, 1999 and the first quarter of
each fiscal year thereafter
First and second fiscal quarters of fiscal $1,100,000
year ending December 31, 1999 and the
first and second fiscal quarters of each
fiscal year thereafter
First, second and third fiscal quarters of $2,750,000
fiscal year ending December 31, 1999 and
the first, second and third fiscal quarters
of each fiscal year thereafter
Fiscal year ending December 31, 1999 and $4,500,000
each fiscal year thereafter"
1.3 Consolidated Debt Service Coverage Ratio. Section 9.3(C)
is amended in its entirety to read as follows:
"(C) Consolidated Debt Service Coverage Ratio. Maintain a
Consolidated Debt Service Coverage Ratio of not less than the ratio shown
below for the period corresponding thereto:
Consolidated Debt
Period Service Coverage Ratio
First and second fiscal quarters of fiscal .negative (.70) to 1.0
year ending December 31, 1998
First, second and third fiscal quarters of 0.7 to 1.0
fiscal year ending December 31, 1998
Fiscal year ending December 31, 1998 1.7 to 1.0
First fiscal quarter of fiscal year ending .30 to 1.0
December 31, 1999 and the first fiscal
quarter of each fiscal year thereafter
First and second fiscal quarters of fiscal .75 to 1.0
year ending December 31, 1999 and the
first and second fiscal quarters of each
fiscal year thereafter
First, second and third fiscal quarters of 1.5 to 1.0
fiscal year ending December 31, 1999 and
the first, second and third fiscal quarters
of each fiscal year thereafter
Fiscal year ending December 31, 1999 and 1.7 to 1.0
each fiscal year thereafter"
1.4 Debt/EBITDA. Section 9.3(E) is amended in its entirety to
read as follows:
(E) Debt/EBITDA. Maintain for each period of four (4)
consecutive fiscal quarters, commencing with the fiscal quarter ending
September 29, 1996, a ratio of (a) Indebtedness for Money Borrowed of Parent
and its Subsidiaries at the end of such period calculated on a Consolidated
basis to (b) the sum of (i) EBITDA for such period less (ii) the greater of
the amount of Capital Expenditures made by Parent and its Subsidiaries during
such period or $1,500,000, of not greater than the ratio shown below for the
period corresponding thereto:
Four (4) Consecutive
Fiscal Quarters Ending With Debt/EBITDA Ratio
Second fiscal quarter of fiscal year ending 4.001.0
December 31, 1998
Third fiscal quarter of fiscal year ending 3.00 to 1.0
December 31, 1998
Fourth fiscal quarter of fiscal year ending 2.80 to 1.0
December 31, 1998
First fiscal quarter of fiscal year ending 2.90 to 1.0
December 31, 1999 and each fiscal year
thereafter
Second fiscal quarter of fiscal year ending 2.75 to 1.0
December 31, 1999 and each fiscal year
thereafter
Third fiscal quarter of fiscal year ending 2.50 to 1.0
December 31, 1999 and each fiscal year
thereafter
Fourth fiscal quarter of fiscal year ending 2.50 to 1.0
December 31, 1999 and each fiscal year
thereafter"
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Each Borrower hereby represents and warrants to the Lender that:
2.1. Compliance with the Loan Agreement and Other Loan Documents.
As of the execution of this Amendment, each Borrower is in compliance with
all of the terms and provisions set forth in the Loan Agreement and in the
other Loan Documents to be observed or performed by such Borrower, except
where the failure of such Borrower to comply has been waived in writing by
the Lender.
2.2. Representations in Loan Agreement and other Loan Documents.
The representations and warranties of each Borrower set forth in the Loan
Agreement and the other Loan Documents are true and correct in all material
respects except for any changes in the nature of any Borrower's business or
operations which have occurred in the ordinary course of business that would
render the information contained in any exhibit attached to the Loan
Agreement either inaccurate or incomplete in any material respect, so long
as (a) the Lender has consented to such changes, (b) such changes are not
expressly prohibited by the Loan Agreement, or (c) with
respect to matters Borrowers are required to notify Lender of pursuant to
Sections 4.9(E) or 9.1(A), Borrowers have given notice as required by such
sections.
2.3. No Event of Default. After giving effect to this Amendment,
no Default or Event of Default exists.
ARTICLE III
MODIFICATION OF LOAN DOCUMENTS
3.1. Loan Documents. The Loan Agreement and each of the other Loan
Documents are amended to provide that any reference to the Loan Agreement in
the Loan Agreement or any of the other Loan Documents shall mean the Loan A
greement as amended by this Amendment, and as it is further amended, restated,
supplemented or modified from time to time.
ARTICLE IV
GENERAL
4.1. Full Force and Effect. As expressly amended hereby, the Loan
Agreement shall continue in full force and effect in accordance with the
provisions thereof. As used in the Loan Agreement, "hereinafter", "hereto",
"hereof" or words of similar import, shall, unless the context
otherwise requires, mean the Loan Agreement as amended by this Amendment.
4.2 Applicable Law. This Amendment shall be governed by and
construed in accordance with the internal laws and judicial decisions of the
State of North Carolina.
4.3 Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original, but all of which
when taken together shall constitute but one and the same instrument.
4.4 Expenses. Borrowers shall reimburse the Lender for all
reasonable fees and expenses (legal or otherwise) incurred by the Lender in
connection with the preparation, negotiation, execution and delivery of this
Amendment and all other agreements and documents or contemplated hereby.
4.5. Headings. The headings in this Amendment are for the purpose
of reference only and shall not affect the construction of this Amendment.
4.6 Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, EACH BORROWER AND THE LENDER EACH WAIVES THE
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR
COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS
AMENDMENT, THE LOAN AGREEMENT OR THE OTHER LOAN DOCUMENTS OR
THE TRANSACTIONS RELATED HERETO OR THERETO.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed and delivered on the date first above written.
BORROWERS:
ATTEST COMDIAL CORPORATION
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST AMERICAN TELECOMMUNICATIONS
CORPORATIONS
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST AMERICAN PHONE CENTERS, INC.
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST COMDIAL ENTERPRISE SYSTEMS,
INC.
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST COMDIAL TELECOMMUNICATIONS
INTERNATIONAL, INC.
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST TELECOM TELECOMMUNICATIONS, INC.
(f/k/a Scott Technologies Corporation)
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST COMDIAL CUSTOM MANUFACTURING,
INC.
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST COMDIAL VIDEO TELEPHONY, INC.
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST COMDIAL TECHNOLOGY
CORPORATION
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST COMDIAL TELECOMMUNICATIONS,
INC.
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST AURORA SYSTEMS, INC.
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST KEY VOICE TECHNOLOGIES, INC.
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST COMDIAL BUSINESS
COMMUNICATIONS CORPORATION
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
ATTEST COMDIAL CONSUMER
COMMUNICATIONS CORPORATION
/s/ Linda P. Falconer By: /s/ Christian L. Becken
Assistant Secretary Christian L. Becken
Senior Vice President
LENDER:
FLEET CAPITAL CORPORATION
BY: \S\ Roland J. Robinson
Title: Senior Vice President
COMDIAL CORPORATION AND SUBSIDIARIES
Exhibit 11
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
(Dollars in thousands except share amounts)
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
BASIC
Net income applicable to
common shares: $1,858 $1,142 $3,697 $1,813
Weighted average number of common
shares outstanding during
the period 8,802,317 8,655,664 8,756,176 8,619,813
Add - Deferred shares 7,500 - 5,963 -
Weighted average number of
shares used in calculation of
basic earnings per common share 8,809,817 8,655,664 8,762,139 8,619,813
Basic earnings per common share $0.21 $0.13 $0.42 $0.21
DILUTED
Net income applicable to
common shares - basic $1,858 $1,142 $3,697 $1,813
Weighted average number of shares
used in calculation of basic
earnings per common share 8,809,817 8,655,664 8,762,139 8,619,813
Add incremental shares representing:
Shares issuable based on
period-end market price or
weighted average price:
Stock options 314,864 128,376 275,265 64,903
Weighted average number of shares
used in calculation of diluted
earnings per common share 9,124,681 8,784,040 9,037,404 8,684,716
Diluted earnings per common share $0.20 $0.13 $0.41 $0.21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-28-1998
<CASH> 336
<SECURITIES> 0
<RECEIVABLES> 16,687
<ALLOWANCES> 106
<INVENTORY> 17,279
<CURRENT-ASSETS> 36,138
<PP&E> 46,263
<DEPRECIATION> 29,910
<TOTAL-ASSETS> 78,729
<CURRENT-LIABILITIES> 20,871
<BONDS> 10,195
0
0
<COMMON> 89
<OTHER-SE> 49,336
<TOTAL-LIABILITY-AND-EQUITY> 78,729
<SALES> 55,709
<TOTAL-REVENUES> 60,598
<CGS> 34,360
<TOTAL-COSTS> 36,495
<OTHER-EXPENSES> 19,744
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 548
<INCOME-PRETAX> 3,811
<INCOME-TAX> 114
<INCOME-CONTINUING> 3,697
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,697
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.41
</TABLE>
EXHIBIT 10.2
ASSET PURCHASE AGREEMENT
BETWEEN
ARRAY TELECOM INC.
ARRAY SYSTEMS COMPUTING INC.
AND
ARRAY TELECOM ACQUISITION CORPORATION
COMDIAL CORPORATION
This Asset Purchase Agreement is entered into as of July 14, 1998,
among ARRAY TELECOM INC. ("ATI") and ARRAY SYSTEMS COMPUTING INC. ("ASCI"),
both corporations incorporated under the laws of the Province of Ontario,
Canada, and having their respective principal offices at 1120 Finch
Avenue West, Toronto, Ontario M3J 3H7, Canada, and ARRAY TELECOM ACQUISITION
CORPORATION ("Buyer") and COMDIAL CORPORATION ("Comdial"), both corporations
incorporated under the laws of the State of Delaware, United States of
America, and having their respective principal offices at 1180 Seminole
Trail, Charlottesville, Virginia 22906, U.S.A. ASCI and ATI are
sometimes herein referred to collectively as the "Sellers" and
individually as a "Seller."
RECITALS
A. Sellers are engaged in the business of developing internet
telephony products, including VOIPgate.com which provides voice and
facsimile services over internet protocol (IP) networks.
B. The parties mutually desire that Sellers shall sell to Buyer
and Buyer shall purchase from Sellers the Array Assets (hereinafter
defined) including, without limitation, its VOIPgate.com product,
together with all intellectual property rights with respect thereto, and
the business constituted by the Array Assets.
C. For purposes of this Agreement, the term "Affiliate," with
reference to either of the Sellers, means the other Seller, Array Systems
Computing Ltd. and any stockholder, director or executive officer of it
or of the Sellers, and any employee of or consultant or advisor (other
than professional and financial advisors) to any of them who has
technical or business knowledge of or experience with the Array Assets;
and the term "Person" means an individual, a corporation, a partnership,
or association or any other entity or organization, including a
government, a governmental body, a political subdivision or an agency or
instrumentality thereof.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties and covenants herein contained, the parties
agree as follows:
ARTICLE 1.
SALE AND PURCHASE OF ARRAY ASSETS
Section 1.1. Sale and Purchase of Assets. Subject to the
terms and conditions of this Agreement, Sellers agree on the Closing Date
(as hereinafter defined) to assign, sell, transfer, convey and deliver to
Buyer, and Buyer agrees on the Closing Date to purchase and acquire from
Sellers, the assets of the Sellers directly related to its VOIPgate.com
product together with all intellectual property rights with respect
thereto (the "Product"), and the tangible and all intangible personal
property, business records, customer lists, contract rights and goodwill
of Sellers related thereto wherever the same may be located (which,
together with the Product, are sometimes herein referred to collectively
as the "Array Assets"), together with the business of the Sellers
constituted by such assets (the "Business"), including, without
limitation, the following:
1.1.1. The name " xe "Array Telecom Inc." Array
Telecom," the registration for the internet domain name "VOIP-
gate.com," and all names and assumed names under which Sellers
develop, market and sell the Array Assets, and all trade names,
trademark or service mark registrations and applications (the
"Trademark Registrations"), common law trademarks, including but
not limited to those identified on Schedule hereto, and all
goodwill associated therewith;
1.1.2. All technology,-know-how, trade secrets, designs,
computer source code, computer object code, copyrights related to
the Array Assets, and all design and development tools, data and
information, engineering notebooks, program documentation, alpha
and beta releases and documentation, field trial information and
reports, support documentation, help files, and all other
information and data related to the development, enhancements,
testing and quality control, marketing and sales of the Array
Assets, including in each case all electronic and documentary
evidence thereof and the computer programs and software (the
"Computer Programs") listed on Schedule hereto but excluding the
Array Contracts listed on Schedule hereto (collectively, the
"Array Technology");
1.1.3. All rights to business relationships and all
contracts and contract rights related to the Array Assets and the
Business (the "Array Contracts"), including those rights pursuant
to the contracts described in Schedule hereto;
1.1.4. All tangible personal property, personal
computers, hard drives, computer tapes, PC boards and cards,
software media duplicating equipment and the fixed assets related
to the Array Assets or used in the Business, excluding any real
property (the "Array Fixed Assets"), and including those properties
listed in Schedule hereto;
1.1.5. All customer lists, contact lists, sales
information, marketing materials and brochures, warranty claim
reports and analyses, and all other business information related to
the Array Assets and the Business (the "Array Business
Information"); and
1.1.6. All inventories of parts, PC boards, components,
recording media and supplies of Seller related to the Array Assets
or the Business (the "Inventory") on hand as of the Closing Date,
and including the Inventory listed in Schedule hereto.
Section 1.2. Excluded Assets For greater certainty, the
parties agree that the Array Assets do not include the following assets
of Sellers:
1.2.1. Cash, investments, securities, certificates of
deposit and other cash items;
1.2.2. Accounts and notes receivable and intercompany
account balances;
1.2.3. Deposits and prepayments other than deposits or
prepayments listed on Schedule which shall be paid over to Buyer
at the Closing in addition to the Array Assets;
1.2.4. Tax or other refunds or rebates due to Sellers;
1.2.5. Rights of Sellers under this Agreement and the
Related Agreements; and
1.2.6. Any other assets of Sellers not directly related
to the Array Assets or the Business.
Section 1.3. Assumed Liabilities. Buyer agrees to assume the
obligations of Sellers that arise on and after the Closing under the
Array Contracts including those listed on Schedule (collectively, the
"Assumed Liabilities"). Except for the Assumed Liabilities, Buyer does
not assume any other liabilities of Sellers or any other liabilities
relating to the Array Assets including, without limitation, liabilities
relating to income, capital, franchise and property taxes, violations of
federal, provincial, state or local law, breaches of contract which
occurred prior to Closing, matters which do not relate to the Array
Assets or Sellers' business, employee benefits, and matters which arose
or are based on events or circumstances that occurred prior to the
Closing.
Section 1.4. Purchase Price. The purchase price for the Array
Assets (the "Purchase Price") shall be Canadian $8,700,000, payable as
follows:
1.4.1. Buyer will pay Canadian $8,400,000.00 or the U.S.
Dollar Equivalent Amount (as hereinafter defined) in cash at the
Closing by wire transfer of funds in that amount to an account
designated by Sellers; and
1.4.2. Buyer will pay Canadian $300,000.00 or the U.S.
Dollar Equivalent Amount by that amount of the first payments made
to ASCI pursuant to the TSA Agreement referred to in Section .
Section 1.5. U.S. Dollar Equivalent Amount. The term "U.S.
Dollar Equivalent Amount" shall mean the amount in U.S. dollars that is
equivalent to the stated Canadian dollar amount using the U.S.-to-Canad-
ian dollar exchange rate at the close of business on the business day
preceding the payment date, as published in the Wall Street Journal on
the succeeding day of its publication.
Section 1.6. Transfer Taxes.
1.6.1. The Buyer shall pay all taxes payable in
connection with the transfer of the Array Assets pursuant to this
Agreement. The Buyer unconditionally and irrevocably agrees and
covenants (for greater certainty, Buyer shall be deemed to have
waived any right of set off or compromise that it might otherwise
have had) to pay any applicable goods and services tax ("GST") on
or before the day that is one (1) month less a day following the
end of each Seller's reporting period for GST purposes at its
option either (i) to each of ATI and ASCI as appropriate or (ii)
directly to Revenue Canada for credit to the relevant Seller's GST
account, in which event Buyer shall furnish evidence of such
payment to Sellers. Buyer's covenant set forth in this Section
shall survive the Closing and shall continue until such tax is paid
in full.
1.6.2. Each of the Sellers will file an appropriate
goods and services tax (GST) return for the reporting period which
includes the Closing Date, which return will be correct and
complete in all material respects with no material fact omitted
therefrom. In the event Buyer elects to pay to Sellers the GST tax
owed by it on the purchase of the Array Assets, all GST tax shown
on Sellers' aforesaid GST returns as due from the sale of the
Array Assets (but net of any input tax credits available to the
Sellers for the reporting period) will be remitted in full by the
date such return is due to be filed and the tax remitted. Each of
the Sellers will provide to Buyer a copy of its GST return for such
reporting period, and in addition shall provide to Buyer evidence
of the related GST remittances with respect thereto.
1.6.3. For purposes of the GST tax, the parties agree to
allocate the Purchase Price between the Sellers as follows: to ATI,
the sum of Canadian $2,408,140, and to ASCI, the sum of $6,291,860.
Buyer and Sellers shall follow the allocations set forth in the
preceding sentence in determining and reporting their liabilities
for GST tax and shall file their respective GST tax returns pre-
pared in accordance with such allocation.
1.6.4. The Sellers agree that if either of them makes a
different allocation of the Purchase Price as between them for any
other tax return, including, without limitation, any income,
capital, franchise, property and sales tax returns, without the
prior written consent of Buyer and Comdial, Sellers will indemnify
and hold harmless Buyer and Comdial from any damage, loss,
liability or expense (including, without limitation, reasonable
expenses of investigation and litigation and reasonable attorney's,
accountant's and other professional fees) relating to the GST tax
paid by Buyer which arises out of or is attributable to such change
in Purchase Price allocation.
ARTICLE 2.
RELATED AGREEMENTS
Section 2.1. Technical Services Agreement. At the Closing,
Buyer will enter into a Technical Services Agreement (the "TSA
Agreement") with ASCI in substantially the form attached hereto as
Exhibit A.
Section 2.2. Administrative Services and Support Agreement.
At the Closing, Buyer will enter into an Administrative Services and
Support Agreement (the "ASA Agreement") with ASCI in substantially the
form attached hereto as Exhibit B.
Section 2.3. Related Agreements. The TSA Agreement and the ASA
Agreement are hereinafter sometimes referred to collectively as the
"Related Agreements."
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally make the following representations
and warranties to Buyer with the intention that Buyer may rely upon the
same and Sellers acknowledge that such representations and warranties
shall be true on the date hereof and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, except for
changes contemplated by this Agreement.
Section 3.1. Organization; Qualification. of the Sellers is a
corporation validly subsisting under the laws of the Province of Ontario,
Canada, and has all requisite power and authority, corporate and
otherwise, to own its properties and assets and to conduct its business
as it is now conducted. Each of the Sellers is qualified to do business
and is in good standing as a foreign corporation in each jurisdiction in
which its business makes such qualification necessary and in which the
failure to so qualify and be in good standing would have a material
adverse effect on the Array Assets or the business of the Seller. Each
of the Sellers has heretofore delivered to Buyer complete and correct
copies of its Articles of Incorporation and Bylaws currently in effect.
Section 3.2. Authority Relative to this Agreement. Each of
the Sellers has corporate power and authority to execute and deliver this
Agreement and, as to ASCI, the Related Agreements, and to consummate the
transactions contemplated hereby and, as to ASCI, thereby. This
Agreement has been duly executed and delivered by the Sellers, and at the
Closing the Related Agreements will have been duly executed by ASCI and,
subject only to authorization by their respective boards of directors and
stockholders, this Agreement constitutes valid and binding obligations of
each of the Sellers and at the Closing the Related Agreements will
constitute valid and binding obligations of ASCI, enforceable against the
Sellers (as to this Agreement) and against ASCI (as to the Related
Agreements) in accordance with their respective terms, except as their
terms may be limited by (i) bankruptcy, insolvency or similar laws
affecting creditors' rights generally or (ii) general principles of
equity, whether considered in a proceeding in equity or at law.
Section 3.3. No Violation. The execution and delivery by the
Sellers of this Agreement and by ASCI of the Related Agreements do not,
and the consummation of the transactions contemplated hereby and thereby
will not, (i) violate, or result in a breach of, any provision of the
Articles of Incorporation or Bylaws of either of the Sellers, (ii)
subject to obtaining the consents set forth in Schedule and the consents
and releases of the secured parties set forth in Schedule , all of which
will be obtained at or prior to the Closing, result in a default, or give
rise to any right of termination, modification or acceleration, or the
imposition of an Encumbrance (as hereinafter defined) on any of the Array
Assets, under the terms or provisions of any agreement or other
instrument or obligation to which either Seller is a party or by which
either Seller, any of the Array Assets or the respective businesses of
the Sellers may be bound, or (iii) violate any law or regulation, or any
judgment, order or decree of any court, governmental body, commission,
agency or arbitrator applicable to either Seller, any of the Array Assets
or the Business, excluding from the foregoing clauses (ii) and (iii) such
defaults and violations which do not and cannot reasonably be expected to
have a material adverse effect on the Array Assets or the Business.
Section 3.4. Tax Reports, Returns and Payment. Each of the
Sellers has accurately prepared and timely filed all federal and
applicable provincial, local, and foreign tax or assessment reports and
returns of every kind required to be filed by it in relation to its
business and the Array Assets including, without limitation, all income
tax, capital tax, goods and services tax, retail sales and use tax, value
added tax, real property and personal property taxes, withholding,
payroll, employer health taxes, custom duties, fees, assessments or
similar charges in the nature of a tax including Canada Pension Plan and
provincial pension plan contributions, employment insurance payments and
workers compensation premiums, and any interest, fines and penalties
imposed by governmental authority (collectively, "Taxes"), and has duly
paid all Taxes and other charges (including interest and penalties) due
or claimed to be due by any taxing authorities, except as disclosed in
Schedule attached hereto. Where required, timely estimated payments or
installment payments of Tax liabilities have been made to all
governmental agencies in amounts sufficient to avoid underpayment
penalties or late payment penalties applicable thereto.
Section 3.5. Tax Residency. Each of the Sellers is not a non-
resident of Canada within the meaning of the Income Tax Act (Canada).
Section 3.6. Sellers' GST and PST Registrations. Each of the
Sellers is a registrant under Part IX of the Excise Tax Act (Canada).
ATI's goods and services tax (GST) registration number is No. 88847 2636
RT0001 and its reporting period during which the Closing occurs ends is
September 30, 1998. ASCI's goods and services tax (GST) registration
number is No. 10027 1618 RT0001 and its reporting period during which the
Closing occurs ends is July 31, 1998. ATI is not registered or required
to be registered as a vendor pursuant to the Retail Sales Tax Act
(Ontario), and has not breached any obligation to pay or remit any retail
sales tax payable or collectible by it under the Retail Sales Tax Act
(Ontario).
Section 3.7. Consents and Approvals. Subject to obtaining the
consents set forth in Schedule and the consents and releases of the
secured parties set forth in Schedule , there is no requirement
applicable to Sellers to make any filing with, or to obtain any consent
or approval from, any Person as a condition to the consummation of the
transactions contemplated by this Agreement.
Section 3.8. Compliance with Laws. Sellers have operated
their respective businesses in compliance with all laws and regulations,
federal, state, provincial or local, applicable to them, including,
without limitation, those related to (i) civil rights, (ii) zoning and
building codes, (iii) public health and safety, (iv) worker health and
safety, (v) labor, employment and discrimination in employment and (vi)
environmental matters, except for such violations thereof as do not and
cannot reasonably be expected to have a material adverse effect on the
Array Assets or the Business or the ability of ASCI to perform its
obligations under the Related Agreements.
Section 3.9. Licenses and Permits. Except for the assignments
of licenses to use the software listed on Schedule , all of which are
assignable to Buyer without consent and without payment, and except for
local business licenses and its GST registrations, neither of which can
be assigned, neither of the Sellers has any permits, licenses, approvals
and notifications, governmental or otherwise relating to either the Array
Assets or the Business, and none is required in order for Sellers to
conduct the Business as it is now conducted.
Section 3.10. Financial Statements. ATI has previously
furnished Buyer with true and complete copies of the unaudited proforma
balance sheet of ATI as at April 30, 1998 (the "ATI Financial
Statement"). The ATI Financial Statement presents fairly the assets,
liabilities and shareholder's equity of ATI as of such date, and has been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis ("GAAP"). ASCI has previously furnished
Buyer with true and complete copies of the audited balance sheet of ASCI
as at August 31, 1997 (the "ASCI Financial Statement"). The ASCI
Financial Statement presents fairly the assets, liabilities and
shareholder's equity of ASCI as of such date, and has been prepared in
accordance with ("GAAP"). The ATI Financial Statement and the ASCI
Financial Statement are sometimes referred to herein collectively as
"Sellers Financial Statements."
Section 3.11. Absence of Change. Since June 11, 1998, the date
of the Memorandum of Understanding between ATI and Comdial with respect
to the subject matter hereof, there has not been any change, or
development involving a prospective change, including, without
limitation, any damage, destruction or loss (whether or not covered by
insurance), which materially adversely affects or can reasonably be
expected to materially adversely affect the Array Assets or the Business,
and neither of the Sellers has entered into any contract which can
reasonably be expected to have any such effect.
Section 3.12. Undisclosed Liabilities. Except as set forth in
Schedule , the Sellers have not incurred, with respect to the Array
Assets or the Business, any liabilities other than those that were
incurred in the ordinary course of business and consistent with past
practices and which have not and cannot reasonably be expected to have a
material adverse effect on the Array Assets or the Business.
Section 3.13. Litigation. There are no actions, suits, claims,
investigations or proceedings pending or, to the best of the knowledge of
Sellers, threatened against Sellers, before any court, governmental body,
commission, agency or arbitrator, which have or can reasonably be
expected to have a material adverse effect on the Array Assets or the
Business which seek to limit, in any manner, the right of Buyer to
control the Business after the consummation of the transactions
contemplated by this Agreement. Furthermore, there are no judgments,
orders or decrees of any such court, governmental body, commission,
agency or arbitrator which have or can reasonably be expected to have any
such effect. The litigation commenced by Telephonics Corporation against
ASCI will not have a material adverse effect upon the ability of ASCI to
discharge its obligations under the TSA Agreement or the ASA Agreement.
Section 3.13.1. Title to Properties. Sellers hold good and
marketable title to the Array Assets, free and clear of all liens,
mortgages, charges, security interests, licenses, leases or other defects
in title ("Encumbrances") except as otherwise set forth in Schedule , all
of which will be released at the Closing as to the Array Assets and the
Business. Sellers do not lease any properties or assets which comprise
the Array Assets or the Business, or which are used in the Business as it
is now conducted.
Section 3.14. Material Contracts. The Array Contracts
constitute all of the material contracts, leases and obligations of
Sellers relating to the Array Assets or the Business. Sellers have
complied in all material respects with all of its obligations under all
of the Array Contracts and, to the best of the knowledge of Sellers, no
event has occurred or condition exists which constitutes or can
reasonably be expected to constitute a breach of any such contract by any
party thereto.
Section 3.15. Intellectual Property. Schedules , , , and ,
together with the Array Business Information described in Section ,
collectively set forth a complete list of all of the intellectual
property that Sellers own or have the right to use in connection with the
Array Assets and the conduct of the Business (the " xe "Intellectual
Property" Intellectual Property"). With respect thereto:
3.15.1. except for the security rights of The Toronto-
Dominion Bank and of Array Systems Computing Ltd. set forth in
Schedule , the Intellectual Property that is owned by Sellers is
owned exclusively by Sellers free from any rights therein by any
other Person, and Sellers have exclusive rights to use, execute,
reproduce, display, advertise, prepare or have prepared derivative
works based thereon, and have the full and exclusive right to sell,
license, lease, or otherwise transfer and assign the Array
Technology to the Buyer;
3.15.2. the Intellectual Property that is licensed by
Sellers is used by Sellers pursuant to license agreements that give
Sellers full and complete rights of use required for the Array
Assets and the Business, and subject only to obtaining the consents
listed in Schedule , Sellers have rights to use, execute,
reproduce, display, advertise, prepare or have prepared derivative
works based thereon, and Sellers have full rights to assign or
otherwise transfer the Array Technology to the Buyer;
3.15.3. Sellers are not infringing upon any rights
arising under United States or Canadian law of any third party
(including any third party's rights derived from any trade secret
or any United States or Canadian trademark, trademark registration
or application therefor, copyright, copyright registration or
application therefor, letters patent, patent application, patent
license or know-how license) and, to the best of the knowledge of
Sellers, Sellers are not infringing upon any rights arising under
the laws of any jurisdiction other than the United States or
Canada; and to the best of the knowledge of the Sellers, no third
party is infringing upon the rights of Sellers in the Intellectual
Property;
3.15.4. except as set forth in Schedule , (i) no portion
of the Array Technology contains any disabling mechanism or
protection feature designed to prevent its use, and (ii) to the
best of the knowledge of Sellers the Intellectual Property is free
from harmful code which has the ability to damage, interfere with
or otherwise adversely affect computer programs, data files or
hardware without the consent or intent of the computer user,
including self-replicating and self-propagating programming
instructions commonly called "viruses" and "worms";
3.15.5. the Array Technology has only one (1) encryption
function embedded in the software code, which function utilizes an
encryption key that does not exceed 32-bits and for which all
required governmental classification reviews or approvals under the
laws of Canada and the United States have been made or obtained;
3.15.6. all components of the Array Technology have been
designed and tested for use before, during, and after the calendar
year 2000 A.D. and will operate during each such period without
error relating to calendar date data including, but not limited to,
any error relating to or resulting from calendar date data that
represents or references different centuries or more than one
century; and
3.15.7. all persons who have been involved with the
development of the Intellectual Property were, at all times during
which they worked on or were involved with the Intellectual
Property, employees of Seller.
Section 3.16. Patents and Copyrights. Sellers own no patents
or registered copyrights, and have not filed any applications for patents
or copyrights, which relate to the Array Assets or the Business.
Section 3.17. Inventory. The Inventory is (i) usable or
saleable in the ordinary course of business of Seller, and (ii) carried
on the books of Seller at an amount which reflects valuations not in
excess of the lower of cost or market, determined in accordance with
GAAP.
Section 3.18. Location of Array Assets. Except as set forth in
Schedule hereto, all of the Array Assets are situated in the Province of
Ontario, Canada.
Section 3.19. Sufficiency of Array Assets. The Array Assets,
together with the rights accorded to Buyer pursuant to the TSA Agreement
and the ASA Agreement, include all of the assets of Sellers used in all
material respects in the conduct of the Business as it is presently being
conducted, and are sufficient for Buyer to maintain, test, market, sell,
service and support the Array Assets as marketed and sold at the Closing.
Section 3.20. Product Warranty Claims. The Array Assets have
been merchantable and free from material defects in material or
workmanship for the term and under the conditions set forth in Sellers'
standard written limited product warranty for its Array Assets. Except
for product warranty claims in the ordinary course of business, during
the last two (2) years Sellers have not received any claims based upon an
alleged breach of product warranty arising from Sellers' sale of its
Array Assets (hereafter collectively referred to as "Product Warranty
Claims"). Sellers have no reasonable grounds to believe that future
Product Warranty Claims with respect to its Array Assets after the
Closing Date will differ from Sellers' past experience with respect
thereto as set forth herein.
Section 3.21. No Export Restrictions. No export permit is now
required, and at Closing no export permit will be required, for the
export of the Array Assets to the United States, and the Array Assets are
now and at the Closing Date will be subject to no other governmental
restrictions under Canadian law including the Export and Import Controls
Act and the Export Control List established pursuant thereto.
Section 3.22. Full Disclosure. None of the information
supplied or to be supplied by Sellers at the date such information is
supplied, and none of the representations and warranties of Sellers made
in this Agreement or in the Related Agreements (a representation and
warranty being deemed to include the information contained in any
schedule hereto or thereto or furnished in connection therewith) contains
an untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
ARTICLE 3.22.1.
REPRESENTATIONS AND WARRANTIES OF BUYER AND COMDIAL
Each of Buyer and Comdial makes the following representations and
warranties about itself to Sellers with the intention that Sellers may
rely upon the same and each of Buyer and Comdial acknowledges that such
representations and warranties shall be true on the date hereof and
(except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the
Closing Date.
Section 3.23. Organization; Qualification. Each of Buyer and
Comdial is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, U.S.A., and has all
requisite power and authority, corporate and otherwise, to own its
properties and assets and to conduct its business as it is now conducted.
Each of Buyer and Comdial is qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which its
business makes such qualification necessary and in which the failure to
so qualify and be in good standing would have a material adverse effect
on its business.
Section 3.24. Authority Relative to this Agreement. Each of
Buyer and Comdial has corporate power and authority to execute and
deliver this Agreement and, as to Buyer, the Related Agreements and to
consummate the transactions contemplated hereby and thereby. This
Agreement has, and at the Closing the Related Agreements will have, been
duly executed and delivered by Buyer and Comdial and, subject only to
authorization by the respective boards of directors of Buyer and Comdial,
this Agreement constitutes, and at the Closing the Related Agreements
will constitute, valid and binding obligations of Buyer and Comdial,
enforceable against them in accordance with their respective terms except
as their terms may be limited by (i) bankruptcy, insolvency or similar
laws affecting creditors' rights generally or (ii) general principles of
equity, whether considered in a proceeding in equity or at law.
Section 3.24.1. No Violation. The execution and delivery by
Buyer and Comdial of this Agreement and by Buyer of the Related
Agreements does not and will not (i) violate or result in a breach of any
provision of the Certificate of Incorporation or Bylaws of either Buyer
or Comdial, as the case may be, (ii) subject to obtaining the consent set
forth in Schedule , result in a default, or give rise to any right of
termination, modification or acceleration under the terms, conditions or
provisions of any agreement or other instrument or obligation to which
either Buyer or Comdial, as the case may be, is a party or by which it
may be bound, or 3.24.1. violate any law or regulation, or judgment,
order or decree of any court, governmental body, commission, agency or
arbitrator applicable to either Buyer or Comdial, as the case may be.
Section 3.25. Buyer's GST Registration. The Buyer is a
registrant under Part IX of the Excise Tax Act (Canada). Its goods and
services tax (GST) registration number is No. 86893 8887 RT.
ARTICLE 4.
ADDITIONAL AGREEMENTS
Section 4.1. Conduct of Business of Sellers. Sellers
represent and covenant with respect to the Array Assets and the Business
that during the period from June 11, 1998 to the Closing (except as Buyer
otherwise has consented or may consent in writing):
4.1.1. The Business has and will be conducted only in
the usual and ordinary course.
4.1.2. Neither of the Sellers has or will sell, dispose,
transfer, assign, lease, encumber or otherwise remove any of the
Array Assets other than Inventory sold in the ordinary course of
business and at regular prices.
4.1.3. Sellers have and will timely pay and discharge
all bills and monetary obligations and timely and properly perform
all of their respective obligations and commitments under all
existing contracts and agreements pertaining to the Array Assets,
except as to amounts or obligations that either Seller contests in
good faith, by appropriate proceedings and against which such
Seller has established adequate reserves.
4.1.4. Sellers have and shall use all reasonable
commercial efforts to preserve their respective business
organizations, the Array Assets and the Business and to keep
available to Buyer the services of Sellers' present employees, and
not to impair relationships with suppliers, customers and others
having business relations with Sellers or the Array Assets or the
Business.
4.1.5. Sellers have not and will not amend, cancel or
assign any Array Contract.
4.1.6. Sellers have not and will not enter into any
contract or series of related contracts involving more than
Canadian $150,000.00.
4.1.7. Sellers have not and will not make any
commitments for capital expenditures.
4.1.8. Except as set forth in Schedule hereto, Sellers
have not and will not increase in any manner, directly or
indirectly, the compensation of any employee or former employee of
either of the Sellers who is an Affiliate of either of them and who
will provide product support services to Buyer under the ASA
Agreement..
Section 4.2. Bulk Sales Laws. Notwithstanding any other
provision of this Agreement, Sellers will indemnify and hold harmless
Buyer from any and all claims made by creditors of Sellers relating to
any "bulk sales laws" and from all costs (including reasonable attorney's
fees) incurred in the defense of any claims made under such laws.
Section 4.3. Product Warranty Claims. Buyer agrees that after
the Closing it will service product warranty claims in accordance with
the terms of such warranty for all Products sold by Sellers during the
ninety (90) days preceding Closing, but at the expense of Sellers.
Sellers shall promptly pay to Buyer its invoices for providing warranty
claim service with respect to such Products, and upon reasonable written
request therefor Buyer shall make available to Sellers such records as
Buyer may have to support its invoices.
Section 4.4. Collection of Accounts Receivable. Buyer agrees
that for the period of six (6) months after the Closing unless sooner
terminated by Sellers (the "Collection Period") it will use commercially
reasonable efforts (but expressly excluding any obligation to commence
legal proceedings) to collect in the ordinary course of its business the
accounts receivable of Sellers relating to the Business which are
outstanding and unpaid on the Closing Date and which are reported to
Buyer at the Closing (the "Sellers' Receivables"). Sellers shall be
responsible to provide Buyer with all necessary information about the
Sellers Receivables reasonably required by Buyer to discharge its
obligations hereunder, including names of account debtors, amounts owed,
date the receivable was created, addresses, telephone numbers, and
contact persons. All amounts collected by Buyer on account of the
Sellers' Receivables will be remitted to Sellers in the form and in the
amounts received by Buyer, as and when received. At the end of the
Collection Period, Buyer will have no further right or obligation to
collect the Sellers' Receivables, and will return all of the aforesaid
information to Sellers.
Section 4.5. Investigation of Business and Properties. From
the date hereof until the Closing, Sellers will afford Buyer and its
authorized representatives including, without limitation, its attorneys,
accountants and financial advisors, full access at all reasonable times
to their respective officers, employees, properties, contracts and books
and records in order to enable Buyer to make a full investigation of the
Array Assets and the Business. Sellers will also furnish Buyer with such
financial, operating and other information regarding the Sellers as Buyer
may reasonably request in making such investigation.
Section 4.6. Subsequent Event. If any event shall occur after
the date of this Agreement and before the Closing which, had it occurred
before the execution of this Agreement, should have been disclosed by
Sellers or Buyer to the other, in a representation and warranty or
otherwise, then, upon the happening of such event, such party shall
promptly make such disclosure.
Section 4.7. Negotiations with Others. From the date hereof
until the Closing and for so long as Comdial uses reasonable efforts to
close the transactions contemplated herein (the "Forbearance Period"),
provided the Forbearance Period shall not extend beyond July 14, 1998
unless otherwise agreed by the parties, Sellers will not, and each Seller
will direct and use its best efforts to cause its Affiliates (including,
without limitation, any attorney or accountant or other agent retained by
it or by any of its Affiliates) not to:
4.7.1. Initiate, solicit or encourage, directly or
indirectly, any inquiries or the making of any proposal or offer,
or accept any offer or proposal or submit any offer or proposal to
any Person, other than Buyer, that constitutes, or could reasonably
be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets,
sale of shares of capital stock or similar transactions involving
either Seller or its business, assets or properties (any of the
foregoing inquiries or proposals being referred to in this
Agreement as an "Acquisition Proposal");
4.7.2. Engage in negotiations or discussions concerning,
or provide any information to any Person relating to, any
Acquisition Proposal; or
4.7.3. Agree to, approve or recommend any Acquisition
Proposal.
Sellers shall promptly (within 24 hours) notify Buyer following the
receipt by either Seller (or its Affiliates or advisors) of any
Acquisition Proposal or any request for information in connection with an
Acquisition Proposal or for access to the properties, books or records of
either Seller or its Affiliates by any Person that informs either Seller
that it is considering making, or has made, an Acquisition Proposal.
Such notice shall be made orally and in writing and shall indicate in
reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact.
Section 4.8. Covenant Not to Compete. Sellers covenant and
agree with Buyer that, for two (2) years after the Closing, without the
prior written consent of Buyer, neither Seller will in any manner,
directly or indirectly, engage in any business activity, or consult or be
connected in any way through ownership, management, operation or control
of any Person that (i) competes, directly or indirectly, with Buyer or
Comdial in the business of developing, manufacturing and providing voice
and/or facsimile products and services over internet protocol (IP)
networks (the "Internet Telephony Business"), or (ii) calls upon,
solicits, diverts or takes away any customer or patron of Buyer, Comdial
or their affiliates for the purpose of causing or attempting to cause any
such person or entity to purchase products sold or services rendered by
Buyer, Comdial or their affiliates in connection with the Internet
Telephony Business from any Person other than Buyer, Comdial or their
affiliates. Sellers further covenant to use all commercially reasonable
efforts to obtain an equivalent agreement not to compete from each of
their Affiliates (other than its employees, if any, who enter into
employment agreements with Buyer or Comdial at or prior to the Closing),
and will assist Buyer at its expense in enforcing such agreements. For
greater certainty, the parties acknowledge that this section shall not
prevent either of Sellers from providing at arm's length (i) to a third
party that is engaged in the Internet Telephony Business products or
services that are unrelated to the Internet Telephony Business, or (ii)
to any third party products or services that (x) involve the attachment
of digital voice or facsimile files to electronic mail transmissions and
(y) are the same as or essentially equivalent to products or services
(other than products or services related to the Internet Telephony
Business) that are currently provided by ASCI to third parties at the
effective date of this Agreement.
Section 4.9. Confidentiality. Sellers agree that from and
after the Closing Buyer will have all of the rights in the Intellectual
Property that Sellers had at the time of the Closing. Sellers further
agree that from and after the Closing, the Intellectual Property and
Sellers' knowledge of the Intellectual Property, the Product, the Array
Assets and the Business, including but not limited to trade secrets,
know-how, information regarding product marketing, development, sales,
accounting and licensing, customer information, working papers,
correspondence, and records or other data (collectively, the
"Confidential Information") is and will be the sole and exclusive
property of Buyer, and Sellers shall treat the Confidential Information
on a confidential basis and not disclose the same to any third party or
use it for the benefit of any Person other than Buyer. Sellers shall use
all commercially reasonable efforts to cause their respective Affiliates
to treat the Confidential Information on a confidential basis and not
disclose the same to any third party or use it for the benefit of any
Person other than Buyer. Notwithstanding the foregoing, Sellers may
disclose such information where, and only to the extent, they are
required to disclose by law, and Sellers shall have no obligation
hereunder for that portion of such information which is disclosed by
Buyer to others without any restriction on use and disclosure. The
obligations of Sellers set forth in this section shall survive the
Closing and the termination of this Agreement indefinitely.
Section 4.10. Expenses. Except as otherwise provided in this
Agreement, Buyer, Sellers and their Affiliates each will pay all of their
respective expenses (including fees and expenses of its legal counsel,
financial advisors, accountants, brokers or other representatives and
consultants and appraisal fees and expenses) incurred in connection with
the negotiation of this Agreement, the performance of each party's
obligations hereunder, and the consummation of the transactions
contemplated hereby.
Section 4.11. Public Announcements. The form, content and
timing of all press releases and other public announcements of any sort
regarding this Agreement or its related transactions, including the
method for publication thereof, will be subject to the prior written
approval of Buyer and Sellers, which approval will not be unreasonably
withheld and will be considered in a timely manner, provided that
disclosures shall be allowed without such approval to the extent required
by law.
Section 4.12. Change of ATI Name. ATI will take all necessary
corporate and other actions to cause its name to be changed within thirty
(30) days after the Closing Date to any name that (i) does not include
the phrase "Array Telecom" and (ii) is not confusingly similar to Buyer's
corporate name or to "Array Telecom Inc." As promptly as may be
practical after ATI effects the change in its corporate name, ATI will
furnish evidence thereof to Buyer. Sellers will deliver to Buyer at
Closing appropriate consents to the use of such corporate name from
Sellers and such of their Affiliates as may be appropriate. Promptly
after the Closing Date, ASCI will file with the Ministry of Consumer and
Commercial Relations a Registration Cancellation under the Business Names
Act of the name "Array Telecom" and will furnish Buyer evidence thereof.
Section 4.13. Internet Web Site. Sellers will, as promptly
after Closing as practical but in no event later than thirty (30) days
after the Closing Date, either (i) remove from their internet web sites
all references to the Product and other internet protocol (IP) telephony
products or services, or (ii) change such references to a content that is
acceptable to Buyer. Sellers also agree that upon request by Buyer,
Sellers will include on their internet web sites for a period of six (6)
months after the Closing Date a hyperlink to the universal resource
locator (URL) for Buyer's or Comdial's internet web site.
Section 4.14. Efforts to Consummate. Subject to the terms and
conditions herein provided, each of the parties agrees to use
commercially reasonable efforts, and Sellers agree to cause their
Affiliates to use their commercially reasonable efforts, to take or cause
to be taken all actions, and to do or cause to be done all things
necessary, proper or advisable to consummate as promptly as practicable
the transactions contemplated hereby including, but not limited to, the
obtaining of all necessary consents, waivers or approvals of third
parties, whether private or governmental, required of it to enable it to
comply with the conditions precedent to consummating the transactions
contemplated by this Agreement. Each party agrees, and Sellers agree to
cause their Affiliates to agree, to cooperate fully with the other
parties in assisting each of such parties to comply with the provisions
of this Section, and Sellers agree to take such steps as may be necessary
to remove any Encumbrances (other than imperfections of title expressly
permitted by this Agreement) which affect the Array Assets.
Section 4.15. Cooperation with Buyer. Sellers agree to
cooperate with Buyer to assist Buyer's efforts to enforce its rights in
relation to, and to execute any documents necessary for Buyer to secure
its title in, the Array Assets and all rights or property derivative
therefrom. Such cooperation includes, but is not limited to, assistance
in preparing and filing patent, copyright or other intellectual property
protection applications in the United States, Canada and in any other
jurisdiction with respect to the Intellectual Property. The actions
required of Sellers pursuant to this Section shall be without cost to
Sellers, except to the extent any of such actions were necessary or
should have been taken by Sellers in order for them to vest or perfect in
Buyer full and complete ownership of the Array Assets as contemplated
herein, in which event such actions all be at the expense of Sellers.
Section 4.16. Further Assurances. Each of the Sellers will use
all commercially reasonable efforts and agrees to cause its Affiliates to
use all commercially reasonable efforts to implement the provisions of
this Agreement, and for such purpose, at the request of Buyer, will at or
after the Closing, without further consideration, promptly execute and
deliver and cause its Affiliates to promptly execute and deliver such
additional documents as may be necessary to consummate more effectively
the transactions contemplated hereby and by the Related Agreements and to
vest in Buyer title to the Array Assets, free and clear of Encumbrances.
Such actions requested by Buyer after the Closing shall be at the expense
of Buyer, except to the extent any of such actions were necessary and
reasonably should have been taken by either of the Sellers in order for
it to carry out its covenants and undertakings set forth in this
Agreement.
ARTICLE 5.
CONDITIONS TO OBLIGATION OF BUYER
The obligation of Buyer to consummate the transactions contemplated
by this Agreement is subject, to the extent not waived, to the following
conditions.
Section 5.1. Representations and Warranties. Each of the
representations and warranties of Sellers contained in this Agreement
(which representations and warranties include the information in the
schedules attached hereto) shall have been true and compete in all
material respects when made, and shall be true and complete in all
material respects on the Closing Date (except to the extent such
representations and warranties speak as of an earlier date, in which case
they shall have been true and complete in all material respects on such
earlier date), and Sellers shall have delivered to Buyer certificates to
that effect signed by their respective Presidents.
Section 5.1.1. Performance of this Agreement. Sellers shall
have complied with all of its obligations under this Agreement and shall
have delivered to Buyer certificates to that effect signed by their
respective Presidents.
Section 5.2. Corporate Authorization. All corporate action
required to be taken by Sellers in connection with the transactions
contemplated by this Agreement shall have been taken, all documents
incident thereto shall be reasonably satisfactory in substance and form
to Buyer, and Buyer shall have received certified copies of appropriate
corporate and stockholder resolutions authorizing such actions together
with such originals or copies of such documents incident thereto as it
may reasonably request.
Section 5.3. Consents and Approvals. The consents and
approvals of all Persons which either of the Sellers must obtain to
transfer the Array Assets and the Business to Buyer, including those
consents listed on Schedule , shall have been obtained and all waiting
periods specified by law with respect thereto (if any) have passed.
Section 5.4. Non-Compete and Confidentiality Agreements.
Buyer shall have received non-compete and confidentiality agreements from
Sellers' employees who are or were familiar with the Array Assets in
accordance with the provisions of Sections and , but including at least
the persons listed on Schedule attached hereto, which will continue in
force for two (2) years after the Closing Date and which will otherwise
be in form and substance satisfactory to Buyer.
Section 5.5. Related Agreements. ASCI shall have executed and
delivered the Related Agreements to Buyer.
Section 5.6. Employment Agreements. Mark D. Scott and Anita
T. Cheng shall have entered into employment agreements (the "Employment
Agreements") with Buyer on terms satisfactory to Buyer in its sole
discretion, provided such Employment Agreements shall be on terms at
least as favorable to each of those individuals as is the individual's
employment agreement with Sellers on June 11, 1998.
Section 5.7. Consent of Fleet Capital. Buyer shall have
received the consent of Fleet Capital Corp., Buyer's principal lender, to
the transactions contemplated in this Agreement.
Section 5.8. Approval by Buyer's Board. The boards of
directors of each of Buyer and Comdial shall have approved this Agreement
and authorized the consummation of the transactions contemplated herein.
Section 5.9. Opinion of Counsel for Sellers. Buyer shall have
received an opinion from Sellers' legal counsel dated as of the Closing
Date, in form and substance reasonably satisfactory to Buyer and its
counsel, to the effect that:
5.9.1. Each of Sellers and its Affiliates which is a
corporation is a corporation duly incorporated and validly
subsisting under the laws of the Province of Ontario, Canada; has
all necessary corporate power to own its properties and assets and
to conduct its business as it is now conducted; and is qualified to
do business in all jurisdictions in which qualification is required
by the nature of the its business and where the failure to so
qualify would have a material adverse effect on the Array Assets;
5.9.2. This Agreement, the Related Agreements and all
other documents executed and delivered in connection with the
consummation of the transactions contemplated herein have been duly
and validly authorized, executed and delivered by Sellers or their
Affiliates, constitute valid and binding obligations of Sellers and
their Affiliates, as the case may be, and are enforceable in
accordance with their terms, except as limited by bankruptcy,
insolvency and other similar laws affecting the rights of creditors
generally, or by general principles of equity;
5.9.3. The sale, transfer and assignment documents
delivered by Sellers to Buyer are effective to transfer to Buyer
full, complete and unencumbered title to the Array Assets as
contemplated in this Agreement, and are legally sufficient for
their intended purposes;
5.9.4. To the best of such counsel's knowledge after
reasonable inquiry, no suit, action, arbitration, legal or
administrative proceeding or governmental investigation is pending
or threatened against Sellers, any of their Affiliates, or the
Array Assets;
5.9.5. Neither the execution nor delivery of this
Agreement, nor the consummation of the transactions contemplated in
this Agreement, will constitute a violation of the Articles of
Incorporation or Bylaws of ATI or ASCI or any of their Affiliates,
or any law, statute, ordinance, rule or regulation binding upon ATI
or ASCI or the Array Assets or, to the best of such counsel's
knowledge, after reasonable inquiry, a default under, or violation
or breach of, any indenture, license, lease, mortgage, instrument,
or other agreement to which Sellers or any of their Affiliates is a
party, or by which Sellers' or any of their Affiliates' properties
may be bound.
5.9.6. Buyer will qualify for and, upon application
therefor by filing its GST return for the reporting period which
includes the Closing Date, will be entitled to an input tax credit
for all of the goods and services tax (GST) that it is required to
pay on account of its purchase of the Array Assets.
In giving such opinion, such counsel may rely, as to matters of fact as
to which such counsel has no knowledge to the contrary, upon certificates
of officers of Sellers or public officials, and as to matters of law
solely upon the laws of the Province of Ontario, Canada and the laws of
Canada applicable in such province.
Section 5.10. Litigation Affecting Closing. No suit, action or
other proceeding shall be pending or threatened by or before any court or
governmental agency in which it is sought to restrain or prohibit or to
obtain damages or other relief in connection with this Agreement or the
consummation of the transactions contemplated by this Agreement, and no
investigation that may result in any such suit, action or other
proceeding shall be pending or threatened.
Section 5.11. Legislation. No statute, rule, regulation or
order shall have been enacted, entered or deemed applicable by any
domestic or foreign government or governmental or administrative agency
or court that would make the transaction contemplated by this Agreement
illegal or otherwise materially adversely affect the Array Assets or
their use and operation in the hands of Buyer.
Section 5.12. Closing Deliveries. The documents, certificates,
agreements and other items required by this Agreement to be delivered to
Buyer at the Closing shall be available for delivery.
ARTICLE 6.
CONDITIONS TO OBLIGATION OF SELLERS
The obligation of Sellers to consummate the transactions
contemplated by this Agreement is subject, to the extent not waived, to
the following conditions.
Section 6.1. Representations and Warranties. Each of the
representations and warranties of Buyer contained in this Agreement shall
have been true and complete in all material respects when made and shall
be true and complete in all material respects on the Closing Date (except
to the extent such representations and warranties speak as of an earlier
date, in which case they shall have been true and complete in all
material respects on such date), and Buyer shall have delivered to
Sellers a certificate to that effect signed by Buyer's President.
Section 6.1. Performance of this Agreement. Buyer shall have
complied with all of its obligations under this Agreement and shall have
delivered to Sellers a certificate to that effect signed by Buyer's
President.
Section 6.2. Corporate Authorization. All corporate action
required to be taken by Buyer in connection with the transactions
contemplated by this Agreement shall have been taken, all documents
incident thereto shall be reasonably satisfactory in substance and form
to Sellers, and Sellers shall have received certified copies of
appropriate corporate resolutions authorizing such actions together with
such originals or copies of such documents as it may reasonably request.
Section 6.3. Related Agreements. Buyer shall have executed
and delivered the Related Agreements to ASCI.
Section 6.4. Approval by Sellers' Boards. The boards of
directors of ATI and ASCI, and ATI's stockholder, shall have approved
this Agreement and authorized the consummation of the transactions
contemplated herein.
Section 6.5. Opinion of Counsel for Buyer. Seller shall have
received a duly executed opinion letter from Buyer's legal counsel dated
as of the Closing Date, in form and substance reasonably satisfactory to
Sellers and their counsel, to the effect that:
6.5.1. Buyer is a corporation duly organized and validly
existing and in good standing in the State of Delaware, U.S.A., and
has all necessary corporate power to own its properties and assets
and to conduct its business as it is now conducted;
6.5.2. This Agreement and all collateral documents have
been duly and validly authorized, executed and delivered by Buyer,
constitute the valid and binding obligations of Buyer, and are
enforceable in accordance with their terms, except as limited by
bankruptcy, insolvency and other similar laws affecting the rights
of creditors generally, or by general principles of equity;
6.5.3. To the best of such counsel's knowledge, after
reasonable inquiry, no suit, action, arbitration, legal or
administrative proceeding, or any governmental investigation, is
pending or threatened against Buyer, its business or properties;
and
6.5.4. Neither the execution nor delivery of this
Agreement, nor the consummation of the transactions contemplated in
this Agreement, will constitute a violation of the Articles of
Incorporation or Bylaws of Buyer, or, to the best of such counsel's
knowledge, after reasonable inquiry, a default under, or violation
or breach of, any indenture, license, lease, mortgage, instrument,
or other agreement to which Buyer is a party, or by which its
properties may be bound.
In giving such opinion, such counsel may rely, as to matters of fact as
to which such counsel has no knowledge to the contrary, upon certificates
of officers of Buyer or public officials, and as to matters of law solely
upon the laws of the State of Delaware, U.S.A.
Section 6.5.4.1. Closing Deliveries. The considerations,
documents, certificates, agreements and other items required by this
Agreement to be delivered to Sellers at the Closing shall be available
for delivery.
ARTICLE 7.
CLOSING
Section 7.1. Time and Place of Closing. The closing of the
transaction contemplated by this Agreement (the "Closing") shall take
place at the offices of Blake, Cassels and Graydon, Toronto, Ontario,
Canada, on July 14, 1998, at 10:00 a.m., or at such other date and time
as the parties may mutually agree in writing. Such date is referred to
herein as the "Closing Date." If the Closing takes place, the Closing
and all of the transactions contemplated by this Agreement shall be
deemed to have occurred simultaneously.
Section 7.2. Deliveries by Sellers. Sellers agree to deliver
the following documents, duly executed as appropriate, to Buyer at the
Closing:
7.2.1. Certified copies of corporate resolutions of each
of the Sellers authorizing each of them to enter into this
Agreement and authorizing ASCI to enter into the Related
Agreements, and authorizing each of them to consummate the
transactions contemplated herein and therein;
7.2.2. A general conveyance and assumption of
liabilities agreement and such other documents as may be necessary
to transfer to Buyer full and unencumbered right and title to the
Array Assets, including an assignment of the Array Contracts, all
of which shall be in form satisfactory to Buyer and suitable for
filing, registration or recording, as appropriate;
7.2.3. All copies of the software constituting the
Product and the Computer Programs, including development,
enhancement, testing and quality control, marketing and sales, and
maintenance materials, whether in hard copy or machine readable
code, and including all copies of the source code and object code
for the Product and the Array Technology;
7.2.4. All copies of documents, correspondence,
brochures, marketing materials, sales materials, business plans,
financial information and other materials not listed above relating
to the Array Assets and the Business, whether in hard copy or
machine readable code;
7.2.5. A certificate of ASCI evidencing the payment of
all taxes collectible or payable by such Seller pursuant to Section
6 of the Retail Sales Tax Act (Ontario);
7.2.6. Documentation of consents by all persons listed
on Schedule , except as waived by Buyer;
7.2.7. Executed non-compete and confidentiality
agreements from Sellers and certain of the Affiliates of the
Sellers, as required by Section ;
7.2.8. The certificates of the Presidents of ATI and
ASCI required by Sections and ;
7.2.9. Executed employment agreements between Buyer and
each of Mark D. Scott and Anita T. Cheng, as required by Section ;
7.2.10. A list of Sellers' Receivables (if any) pursuant
to Section ;
7.2.11. Consents to the use of Buyer's corporate name or
its use after the Closing Date of the name "Array Telecom Inc."
signed by each of the Sellers, Array Systems Computing Ltd., Stuart
J. Berkowitz, and Irene Berkowitz.
7.2.12. Opinion of Sellers' counsel as required by
Section ; and
7.2.13. Such other documents as Buyer may reasonably
request for the purpose of assigning, transferring, granting,
conveying and confirming to Buyer or reducing to its possession all
of the Array Assets, and otherwise to carry out the transactions
contemplated under this Agreement and the Related Agreements.
Section 7.3. Deliveries by Buyer. Buyer agrees to deliver the
following documents, duly executed as appropriate, to Sellers at the
Closing:
7.3.1. Certified copies of corporate resolutions of
Buyer authorizing it to enter into this Agreement and the Related
Agreements and to consummate the transactions contemplated herein
and therein;
7.3.2. Wire transfer of the amount of funds described in
Section ;
7.3.3. The certificates of the President of Buyer
required by Sections and ;
7.3.4. Opinion of Buyer's counsel as required by Section
; and
7.3.5. Such other documents as Sellers reasonably may
request to carry out the transactions contemplated under this
Agreement and the Related Agreements.
Section 7.4. Deliveries by ASCI, Buyer and Comdial. At the
Closing, ASCI, Buyer and Comdial shall each execute and deliver to the
others the Related Agreements.
ARTICLE 8.
INDEMNIFICATION
Section 8.1. Indemnification by Sellers. Subject to the
limitations contained in this Article, Sellers will jointly and severally
indemnify and hold Buyer harmless from any damage, loss, liability or
expense (including, without limitation, reasonable expenses of
investigation and litigation and reasonable attorney's, accountant's and
other professional fees) (collectively, "Loss") arising out of:
8.1.1. a breach of any representation, warranty or
covenant made by Sellers in this Agreement (but not the Related
Agreements, each of which will stand on its own); or
8.1.2. any liability or obligation of Sellers not
expressly assumed by Buyer in this Agreement, and any liability or
obligation which imposes a lien or charge on the Array Assets not
expressly permitted by this Agreement.
Notwithstanding the foregoing, Buyer shall not be entitled to
indemnification for any breach by Sellers of a representation, warranty
or covenant made by Sellers in this Agreement of which Buyer has actual
knowledge (a "Known Breach") prior to Closing. In the case of a Known
Breach, Buyer shall disclose such matter to Sellers prior to Closing and,
at Buyer's sole option, Buyer may elect to be excused from its
obligations hereunder to close unless and until Sellers cure the Known
Breach. In the event of any claim from indemnification hereunder, Buyer
shall have the burden of proof with respect to establishing the breach of
a representation, warranty or covenant made by Sellers in this Agreement,
and Sellers shall have the burden of proof with respect to establishing
Buyer's actual knowledge of such breach prior to Closing.
Notwithstanding the foregoing, Buyer's knowledge of the claim by
Telephonics Corporation and the resultant litigation against ASCI shall
not be deemed to constitute a Known Breach.
Section 8.2. Third Party Claims. The obligation of Sellers to
indemnify Buyer under the provisions of this Article with respect to
claims resulting from the assertion of liability by those not parties to
this Agreement (including governmental claims for penalties, fines and
assessments) shall be subject to the following terms and conditions:
8.2.1. Buyer shall give prompt written notice to Sellers
of any assertion of liability by a third party which might give
rise to a claim for indemnification, which notice shall state the
nature and basis of the assertion and the amount thereof, to the
extent known; provided, however, that no delay on the part of Buyer
in giving notice shall relieve Sellers of any obligation to
indemnify unless (and then solely to the extent that) Sellers are
prejudiced by such delay and such delay results from the negligence
or willful misconduct of Buyer.
8.2.2. If any action, suit or proceeding (a "Legal
Action") is brought against Buyer with respect to which Sellers may
have an obligation to indemnify Buyer, the Legal Action shall be
defended by Sellers and such defense to include all proceedings for
appeal or review which counsel for Buyer shall reasonably deem
appropriate.
8.2.3. Notwithstanding the provisions of the previous
subsection of this Article, until Sellers shall have assumed the
defense of any such Legal Action, the defense shall be handled by
Buyer. Furthermore, (i) if Buyer shall have reasonably concluded
that there are likely to be defenses available to it that are
different from or in addition to those available to Sellers, (ii)
if Sellers fail to provide Buyer with evidence reasonably
acceptable to Buyer that Sellers have sufficient financial
resources to defend and fulfill its indemnification obligation with
respect to the Legal Action, (iii) if the Legal Action involves
other than money damages and seeks injunctive or other equitable
relief, or (iv) if a judgment against Buyer will, in the good faith
opinion of Buyer, establish a custom or precedent which will be
adverse to the best interests of its continuing business, Sellers
shall not be entitled to assume the defense of the Legal Action and
the defense shall be handled by Buyer. If the defense of the Legal
Action is handled by Buyer under the provisions of this subsection,
Sellers shall pay all legal and other expenses reasonably incurred
by Buyer in conducting such defense.
8.2.4. In any Legal Action initiated by a third party
and defended by Sellers (i) Buyer shall have the right to be
represented by advisory counsel and accountants, at its own
expense, (ii) Sellers shall keep Buyer fully informed as to the
status of such Legal Action at all stages thereof, whether or not
Buyer is represented by its own counsel, (iii) Sellers shall make
available to Buyer and its attorneys, accountants and other
representatives, all books and records of Sellers relating to such
Legal Action, and (iv) the parties shall render to each other such
assistance as may be reasonably required in order to ensure the
proper and adequate defense of the Legal Action.
8.2.5. In any Legal Action initiated by a third party
and defended by Sellers, Sellers shall not make settlement of any
claim without the written consent of Buyer, which consent shall not
be unreasonably withheld or delayed. Without limiting the
generality of the foregoing, it shall not be deemed unreasonable to
withhold consent to a settlement involving injunctive or other
equitable relief against Buyer or its assets, employees or
business, or relief which Buyer reasonably believes could establish
a custom or precedent which will be adverse to the best interests
of its continuing business.
Section 8.3. Determination of Indemnification Amount.
Notwithstanding the foregoing provisions of this Article :
8.3.1. Except as otherwise set forth in Section ,
Sellers shall not be liable to Buyer (i) for any Loss under this
Article or (ii) on account of any claim by Buyer for money damages
from Sellers or either of them for a claim for which
indemnification would otherwise be available to Buyer under Section
(a "Law Claim"), unless and until the aggregate amount of their
joint or several liability hereunder exceeds Canadian $50,000, and
thereafter Buyer shall be entitled to indemnification for Loss
hereunder and for money damages for Law Claims only for the
aggregate amount of such liabilities in excess of Canadian
$50,000.00 (the "Indemnification Amount"). For greater certainty,
the limitation of this Section does not apply to any legal
proceeding seeking money damages for any matter other than a Loss
or a Law Claim, or seeking injunctive relief, specific performance
or any remedy other than money damages, whether at law or in
equity.
8.3.2. The Indemnification Amount for a breach of
Sellers' covenant of indemnification set forth in Section and
shall be the amount of their liability thereunder, without
exclusion of the amount set forth in Section . The Indemnification
Amount for any liability under the Array Contracts other than the
Assumed Liabilities and for any liability that gives rise to a
security interest, charge, encumbrance, or lien on the Array Assets
shall be the amount of such liability, without exclusion of the
amount set forth in Section .
8.3.3. Sellers shall not be liable to Buyer under this
Article for any Indemnification Amounts and Law Claims in the
aggregate in excess of whichever of the following limitations is
applicable:
8.3.3.1. For a Indemnification Amount based on a
breach of the representations, warranties and covenants of
Sellers, or either of them, set forth in Sections (relating
to GST allocation), (Authority Relative to this Agreement),
(Litigation), (Title to Properties), (Intellectual
Property), (Patents and Copyrights), (Sufficiency of Array
Assets), (Product Warranty Claims), (Full Disclosure),
(Covenant Not to Compete) and (Confidentiality), the maximum
amount thereof shall be an amount equal to the Purchase
Price; and
8.3.3.2. For an Indemnification Amount based on a
breach of any representation, warranty or covenant of
Sellers, or either of them, set forth in this Agreement other
than those listed in Section , the maximum amount thereof
shall be Canadian $500,000.00.
For greater certainty, the limitation of this Section does not
apply to any legal proceeding seeking money damages for any matter
other than a Loss or a Law Claim, or seeking injunctive relief,
specific performance or any remedy other than money damages,
whether at law or in equity.
8.3.4. The Indemnification Amount shall be net of any
insurance coverage with respect thereto.
8.3.4.1. The Indemnification Amount shall be determined on an
After Tax Basis (hereinafter defined). For this purpose, "After Tax
Basis" shall mean that the Indemnification Amount is adjusted so that,
after payment of all income taxes required to be paid by Buyer with
respect to the receipt of such amount and reflection of all income tax
savings realized by Buyer as a result of the Loss, and after payment of
all goods and services taxes (GST) required to be paid by Buyer with
respect to the receipt of such amount, such adjusted amount is equal to
the Indemnification Amount otherwise required to be made to Buyer
pursuant to this Agreement without regard to this Section . For purposes
of the preceding sentence, the amount of taxes required to be paid on the
receipt of such amount and the amount of tax savings realized as a result
of a payment shall be calculated at the then maximum marginal rates
generally applicable to Persons of the same type as the recipients.
Section 8.4. Survival of Sellers' Representations, Etc. The
representations, warranties and covenants of Sellers, or either of them,
contained in this Agreement shall survive any investigation by Buyer and
shall survive the Closing for the applicable period of time specified
below (each, a "Survival Date"), after which any right to seek
indemnification or to demand performance or to make a claim for a breach
thereof shall expire and Sellers shall have no further liability
therefor:
8.4.1. any representation, warranty or covenant for
which no other survival date is stated in the following provisions
of this Section shall survive the Closing for a period expiring
eighteen (18) months after the Closing Date (the "Normal Survival
Date").
8.4.2. any representation, warranty or covenant that
provides for its duration shall survive the Closing in accordance
with its terms (the "Specified Survival Date");
8.4.3. any representation, warranty or covenant relating
to Taxes of Sellers, or either of them, shall survive the Closing
for a period expiring on the thirtieth (30th) day following the
last day on which the relevant taxing authority is entitled to
assess or reassess Seller in respect of Taxes owing by it for any
period of Seller ending on or prior to the Closing Date (the "Tax
Survival Date");
8.4.4. any representation, warranty or covenant relating
to ownership of and title to the Array Assets, the freedom of such
assets from Encumbrances, infringement and claims of others, and
confidentiality respecting such assets, including those
representations, warranties and covenants set forth in Sections
(Title to Properties), (Intellectual Property), (Patents and
Copyrights), (Sufficiency of Array Assets) and (Product Warranty
Claims), shall survive the Closing for a period expiring seven (7)
years after the Closing Date (the "Extended Survival Date"); and
8.4.5. any representation, warranty or covenant in
respect of which indemnification may be sought under this Article
shall survive its Survival Date if written notice, given in good
faith, of a specific breach thereof is given to Seller prior to its
Survival Date, whether or not liability has actually been incurred.
Section 8.5. Survival of Representations, Etc by Buyer and
Comdial. Except for the covenant of Buyer set forth in Section , which
shall survive the Closing for the period of time set forth therein, the
other representations, warranties and covenants of Buyer and Comdial
contained in this Agreement shall survive the Closing for a period of
eighteen (18) months after the Closing, after which any right to seek
indemnification or to demand performance or to make a claim for a breach
thereof shall expire and neither Buyer nor Comdial shall have any further
liability therefor
ARTICLE 8.5.1.
TERMINATION, AMENDMENT AND WAIVER
Section 8.6. Termination. This Agreement may be terminated at
any time prior to the Closing:
8.6.1. by mutual consent of the Boards of Directors of
ATI, ASCI, Buyer and Comdial;
8.6.2. by Sellers if any condition to Sellers' closing
has not been fulfilled (unless such failure is the result of action
by either of the Sellers);
8.6.3. by Buyer if any condition to Buyer's closing has
not been fulfilled (unless such failure is the result of action by
Buyer);
8.6.4. by Buyer if any change has occurred since June
11, 1998 which has or can reasonably be expected to have a material
adverse effect upon the Array Assets or the Business;
8.6.5. by Sellers or Buyer if the Closing has not
occurred by July 14, 1998.
Section 8.7. Effect of Termination. If this Agreement is
terminated as provided above, it shall become wholly void and of no
further force and effect, and there shall be no further liability or
obligation on the part of either party except to pay such expenses as are
required of it and to comply with the provisions of any separate
confidentiality agreement between the parties relating to the subject
matter hereof, but such termination shall not constitute a waiver by
either party of any claim it may have for damages caused by reason of a
breach of a representation, warranty or agreement made by the other
party.
Section 8.8. Amendment. This Agreement and the Exhibits and
Schedules hereto may be amended at any time before the Closing, provided
that any such amendment is approved in writing by each of the parties.
All representations and warranties which are true and complete, as
modified and approved, shall be deemed true and complete for the purposes
of Sections and .
Section 8.9. Extension; Waiver. At any time before the
Closing, either party that is entitled to the benefits thereof may
(i) extend the time for the performance of any of the obligations of the
other party, (ii) waive a breach of a representation or warranty by the
other party, or (iii) waive compliance by the other party with any of the
agreements or conditions contained herein. Any such extension or waiver
shall be valid if set forth in a written instrument signed by the party
giving the extension or waiver.
ARTICLE 9.
GENERAL PROVISIONS
Section 9.1. Entire Agreement. This Agreement, together with
the Exhibits, the Schedules, the Related Agreements, and any other
written agreements specifically referred to herein, represents the entire
agreement and supersedes all other prior agreements and understandings,
both written and oral, between the parties with respect to the subject
matter hereof except that Paragraph 10 of the Memorandum of Understanding
shall survive and remain in full force and effect in accordance with its
terms until the escrow arrangement provided therein has terminated.
Section 9.2. Notices Any notice or other communication
required or permitted hereunder shall be in writing and shall be deemed
to have been given (i) when received, if delivered by hand, telegram,
telex or telefax, and (ii) seven (7) days after being sent, if placed in
the mails for delivery by air mail, postage prepaid, addressed to the
appropriate parties as specified below.
If to ATI or ASCI, to:
Array Telecom Inc.
1120 Finch Avenue West
Toronto, Ontario M3J 3H7
Canada
Attention: Stuart J. Berkowitz
Telefax No. (416) 736-4715
with a copy to:
Lang Michener
BCE Place, Suite 2500
181 Bay Street
Post Office Box 747
Toronto, Ontario M5J 2T7
Canada
Attention: Howard M. Drabinsky
Telefax No. (416) 365-1719
If to Buyer or Comdial, to:
Comdial Corporation
1180 Seminole Trail
Charlottesville, Virginia 22901
Attention: Christian L. Becken
Telefax No. (804) 978-2512
with a copy to:
McGuire, Woods, Battle & Boothe LLP
Court Square Building
Post Office Box 1288
Charlottesville, Virginia 22902
Attention: Robert E. Stroud
Telefax No. (804) 980-2272
Addresses may be changed by written notice given pursuant to this
section, provided that any such notice shall not be effective, if mailed,
until three (3) working days after depositing the notice of new address
in the mails or actual receipt of such notice, whichever occurs first.
Section 9.3. Governing Law. This Agreement and any questions
concerning its validity, construction or performance shall be governed by
the laws of the Province of Ontario, Canada, and the laws of Canada
applicable in that Province, without regard to choice of law provisions,
and shall be treated in all respects as an Ontario, Canada contract.
Section 11.4 Schedules and Exhibits. The information
contained in any schedule or exhibit that is referred to in any section
of this Agreement shall be in writing and shall constitute a part of this
Agreement.
Section 11.5 Headings The headings of the provisions of this
Agreement are inserted for reference purposes only and shall not affect
the meaning or interpretation of the Agreement.
Section 11.6 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument. Each
party agrees to accept and rely on the facsimile signature of the other
party as proper execution of this Agreement and agrees to provide a hard
copy of its signature to the other party promptly after execution hereof.
Section 11.7 Benefit Nothing in this Agreement, expressed or
implied, is intended to confer upon any Person other than the parties to
this Agreement or their permitted successors or assigns, any rights,
remedies, obligations or liabilities under or by reason of this
Agreement.
Section 11.8 Successors and Assigns. None of the Sellers,
Buyer or Comdial shall assign or transfer any of its rights or
obligations hereunder without the prior written consent of the other
parties. Subject to the foregoing, this Agreement and the Related
Agreements shall be binding on the parties thereto, their respective
successors and permitted assigns.
Section 11.9 Execution by Comdial. Comdial hereby guarantees
to Sellers the payment obligations and the performance obligations of
ATAC pursuant to this Agreement and executes this Agreement solely for
the purposes of (i) making the representations and warranties applicable
to it which are set forth in Article , and (ii) evidencing its guarantee,
and for no other purposes.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in the manner appropriate to each, to be
effective as of the date first above written.
ARRAY TELECOM INC.
By: \S\ STUART J. BERKOWITZ
STUART J. BERKOWITZ
President
ARRAY SYSTEMS COMPUTING INC.
By: \S\ STUART J. BERKOWITZ
STUART J. BERKOWITZ
President
ARRAY TELECOM ACQUISITION CORPORATION
By: \S\ CHRISTIAN L. BECKEN
CHRISTIAN L. BECKEN
Senior Vice President
COMDIAL CORPORATION
By: \S\ CHRISTIAN L. BECKEN
CHRISTIAN L. BECKEN
Senior Vice President
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