<PAGE>
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 quarter ended JUNE 30, 1998 or
( ) Transition report pursuant to Section l3 or l5(d) of the Securities
Exchange Act of l934
For the transition period N/A
Commission file Number 1-10346
MICROTEL INTERNATIONAL, INC.
- -----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0226211
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4290 E. Brickell Street, Ontario California 91761
- ---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (909) 456-4321
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
- --------------------------------- on which registered
----------------------
Common Stock $.0033 par value None
- -----------------------------------------------------------------------------
Securities registered pursuant to Section 12 (g) of the Act:
None
- -----------------------------------------------------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
As of July 31, 1998, there were 11,930,444 shares of common stock outstanding.
<PAGE>
MICROTEL INTERNATIONAL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Condensed Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Operations
Three and Six Months Ended June 30, 1998 and l997 4
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 1998 and l997 5
Notes to Consolidated Condensed Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
PROFORMA
(SEE NOTE 7)
JUNE 30, JUNE 30, DEC. 31,
1998 1998 1997
------------- ----------- -----------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 923 $ 2,311 $ 1,921
Accounts receivable 6,849 6,849 6,749
Inventories 6,288 6,288 7,087
Other current assets 715 715 869
------------- ----------- -----------
Total current assets 14,775 16,163 16,626
Property, plant and equipment-net 2,032 2,032 4,968
Goodwill-net 1,809 1,809 1,906
Other assets 2,490 2,602 1,940
------------- ----------- -----------
$ 21,106 $ 22,606 $ 25,440
------------- ----------- -----------
------------- ----------- -----------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 4,320 $ 4,320 $ 3,630
Current portion of long-term debt 880 880 1,216
Accounts payable 4,540 4,540 6,621
Accrued expenses 3,542 3,542 3,837
------------- ----------- -----------
Total current liabilities 13,282 13,282 15,304
Long-term debt, less current portion 1,664 1,664 2,530
Other liabilities 720 720 789
Minority interest 94 94 88
------------- ----------- -----------
Total liabilities 15,760 15,760 18,711
Redeemable preferred stock 459 1,836 714
Stockholders' equity:
Common stock 39 39 39
Additional paid-in capital 20,005 20,128 19,960
Accumulated deficit (15,056) (15,056) (13,877)
Foreign currency translation adjustment (101) (101) (107)
------------- ----------- -----------
Total stockholders' equity 4,887 5,010 6,015
------------- ----------- -----------
$ 21,106 $ 22,606 $ 25,440
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 8,971 $ 12,029 $ 18,713 $ 19,736
Cost of sales 5,555 8,875 13,061 14,972
------------ ------------ ------------ ------------
Gross profit 3,416 3,154 5,652 4,764
Operating expenses:
Selling, general and administrative 2,796 3,643 5,914 5,555
Engineering and product development 574 694 1,145 792
------------ ------------ ------------ ------------
Income (loss) from operations 46 (1,183) (1,407) (1,583)
Other expense (income)
Interest expense 177 262 344 460
Gain on sale of subsidiary 90 -- (580) --
Other (25) (8) (43) (7)
------------ ------------ ------------ ------------
Loss before income taxes (196) (1,437) (1,128) (2,036)
Income taxes expense (benefit) 22 (2) 37 2
------------ ------------ ------------ ------------
Net loss $ (218) $ (1,435) $ (1,165) $ (2,038)
------------ ------------ ------------ ------------
Basic and diluted loss per share $ (0.02) $ (0.13) $ (0.10) $ (0.24)
------------ ------------ ------------ ------------
Weighted average number of shares used in calculating 11,929 11,005 11,928 8,638
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
------------ ----------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,165) $ (2,038)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 312 356
Amortization of intangibles 97 287
Gain on sale of subsidiary (580) --
Other noncash items (64) 46
Changes in operating assets and liabilities:
Accounts receivable (515) (1,177)
Inventories 6 1,265
Other assets (56) (62)
Accounts payable and accrued expenses (295) (1,443)
------------ ----------
Cash used in operating activities (2,260) (2,766)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (178) (23)
Proceeds from sale of subsidiary 1,350 --
Cash acquired in reverse acquisition -- 264
------------ ----------
Cash provided by investing activities 1,172 241
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from notes payable 640 (699)
Net repayments of long-term debt (1,015) (476)
Preferred stock dividends paid -- (140)
Private placement of convertible preferred stock 459 --
Private placement of common stock -- 4,258
------------ ----------
Cash provided by financing activities 84 2,943
EFFECT OF EXCHANGE RATE CHANGES ON CASH 6 --
------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (998) 418
------------ ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,921 886
------------ ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 923 $ 1,304
------------ ----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE
WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE,"
"PROJECT," "INTEND," "SHOULD," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE
COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND
FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN
NOTES 6 AND 8 HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER
MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the "Company") is a holding company
for its three wholly-owned subsidiaries- CXR Telcom Corporation, CXR
S.A. and, effective March 26, 1997, XIT Corporation ("XIT"). CXR Telcom
Corporation and CXR S.A. design, manufacture and market electronic
telecommunication test instruments and data transmission and networking
equipment. XIT designs, manufactures, and markets information technology
products, including displays and input components, subsystem assemblies
power supplies, hybrid microelectronic and other circuits. The Company
conducts its operations out of various facilities in the U.S., France,
England, and Japan and organizes itself in three product line sectors -
Instrumentation and Test Equipment, Components and Subsystem Assemblies,
and Circuits.
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all
information and footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. The unaudited consolidated
condensed financial statements do, however, reflect all adjustments,
consisting of only normal recurring adjustments, which are, in the opinion
of management, necessary to state fairly the financial position as of June
30, 1998 and December 31, 1997 and the results of operations and cash flows
for the related interim periods ended June 30, 1998 and 1997. However,
these results are not necessarily indicative of results for any other
interim period or for the year. It is suggested that the accompanying
consolidated condensed financial statements be read in conjunction with the
Company's Consolidated Financial Statements included in its 1997 Annual
Report on Form 10-K.
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(2) LOSS PER SHARE
The following table illustrates the computation of basic and diluted
loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------- ------ ------ ------
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss $(218) $(1,435) $(1,165) $(2,038)
Less: accretion of the
excess of the redemption value
over the carrying value of
redeemable preferred stock -- 17 13 34
------- ------ ------ ------
Loss attributable to common
stockholders (218) (1,452) (1,178) (2,072)
DENOMINATOR:
Weighted average number of
common shares outstanding
during the period 11,929 11,005 11,928 8,638
------- ------ ------ ------
Basic and diluted loss per
share $(.02) $(.13) $ (.10) $(.24)
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding
common stock options and warrants because their effect was antidilutive due
to losses incurred by the Company or such instruments had exercise prices
greater than the average market price of the common shares during the
periods presented.
(3) COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). Comprehensive income (loss) is comprised of net income
(loss) and all changes to stockholders' equity except those due to
investment by owners (changes in paid-in capital) and distributions to
owners (dividends). For interim reporting purposes, SFAS 130 requires
disclosure of total comprehensive income (loss). Comprehensive loss,
consisting of net loss, foreign currency translation effects and accretion
of preferred stock, was $272,000 and $1,452,000 for the three months ended
June 30, 1998 and 1997, respectively and $1,184,000 and $2,072,000 for the
six months ended June 30, 1998 and 1997, respectively.
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(4) INVENTORIES
Inventories consist of the following.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials $ 2,475,000 $ 3,044,000
Work-in-process 2,172,000 2,333,000
Finished goods 1,641,000 1,710,000
-------------- --------------
$ 6,288,000 $ 7,087,000
-------------- --------------
-------------- --------------
</TABLE>
(5) BANKING ARRANGEMENTS
The Company's XIT subsidiary had a line of credit with a bank (the
"XIT Debt") which provided for maximum borrowings of $3,500,000
collateralized by substantially all assets of XIT and its domestic
subsidiaries with interest at the bank's prime rate (8.5% at
June 30, 1998) plus 1%. The XIT Debt agreement required maintenance of
certain financial ratios and contained other restrictive covenants. XIT
was not in compliance with certain covenants of the XIT Debt agreement at
December 31, 1997 and at June 30, 1998. Although the bank did not waive
compliance with such debt covenants, it entered into a forbearance
agreement with the Company in which it agreed to forbear from exercising
its rights under the terms of the XIT Debt agreement provided the Company
obtain a replacement credit facility. Outstanding borrowings under this
line of credit were $2,831,000 and $2,377,000 at June 30, 1998 and
December 31, 1997, respectively.
On July 8, 1998, the Company finalized a $10.5 million credit
facility with a commercial finance company which provided a term loan of
approximately $1.5 million and a revolving line of credit of up to $8
million based upon assets available from either existing or
future-acquired operations of which the Company has utilized
approximately $4 million, and a capital equipment expenditure credit
line of up to $1 million. This credit facility replaced the existing
credit facilities of the Company's domestic operating companies, which
included the XIT Debt and CXR Telcom Corporation's line of credit, both
of which were paid in full at the closing and provides expanded
borrowing capability based upon available assets.
(6) LITIGATION
The Company and its subsidiaries are, from time to time, involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate
liability cannot presently be determined because of considerable
uncertainties that exist. Therefore, it is possible the outcome of such
legal proceedings, claims and litigation could have a material effect on
quarterly or annual operating results or cash flows when resolved in a
future period. However, based on facts currently available, management
believes such matters will not have a material adverse affect on the
Company's consolidated financial position, results of operations or cash
flows.
-8-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(6) LITIGATION (CONTINUED)
FRANCIS JOHN GORRY V. MICROTEL INTERNATIONAL, INC.
In 1994, Francis John Gorry, a former officer of the Company, alleged
that the Company breached a consulting agreement between he and the
Company. Subsequently, the Company and Mr. Gorry entered into an agreement
which called for certain cash payments to Mr. Gorry and for the issuance to
Mr. Gorry and subsequent registration of shares of the Company's common
stock by April 30, 1996. The Company failed to timely issue the stock and
on May 21, 1996, Mr. Gorry filed suit against the Company (the "1996
Suit"). Shortly thereafter, the Company and Mr. Gorry entered into a
Settlement Agreement which was thereafter amended twice. Based upon the
execution of the Settlement Agreement, the court dismissed Mr. Gorry's suit
without prejudice. The cash payments specified under the terms of the
Settlement Agreement, as amended, were timely made and the shares of the
Company's common stock were issued to Mr. Gorry and subsequently registered
pursuant to the terms of the Settlement Agreement, as amended. On
June 18, 1998, Mr. Gorry made a motion to the court for an order vacating
the dismissal of the 1996 Suit for the purpose of entering judgment against
the Company, claiming the common shares delivered to him did not conform to
the terms of the Settlement Agreement, as amended. On July 17, 1998, the
court granted Mr. Gorry's motion. The Company will appeal the court's
decision as it believes the claim which forms the basis for Mr. Gorry's
motion is without merit.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
In October 1996, David Scheinfeld brought an action in the Supreme
Court of the State of New York, County of New York, to recover monetary
damages in the amount of $300,000 allegedly sustained by the failure of the
Company, its stock transfer agent and its counsel to timely deliver and
register 30,000 shares of Common Stock for which payment had been made.
The Company was informed by Mr. Scheinfeld that in order to settle his
claims, the Company would have to issue him unrestricted shares of common
stock. Since the Company cannot issue unrestricted shares (absent
registration), the Company answered Mr. Scheinfeld's motion and sought to
compel him to serve a complaint upon the defendants. On June 30, 1997, the
complaint was served, and the Company has subsequently answered, denying
the material allegations of the complaint. In August 1997, the Company
served discovery requests on Mr. Scheinfeld, who was initially obligated to
respond by September 12, 1997. On March 2, 1998, Mr. Scheinfeld responded
to such discovery requests which response is currently under review by
counsel to the Company. Currently, the parties are actively engaged in
settlement discussions.
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
LITIGATION (CONTINUED)
DANIEL DROR V. MICROTEL INTERNATIONAL, INC.
In November 1996, the Company entered into an agreement (the
"Agreement") with the former Chairman of the Company, which involved
certain mutual obligations. In December 1997, the former Chairman
defaulted on the repayment of the first installment of a debt obligation
which was an obligation set forth in the Agreement. Also in December 1997,
the former Chairman of the Company, filed suit in the District Court for
Galveston County, Texas alleging the Company has breached an alleged oral
modification of the Agreement. In January 1998, the Company answered the
complaint denying the allegation and the matter is currently being
litigated in Texas. The Company believes that the former Chairman's claim
is without merit and intends to vigorously defend itself. Subsequently,
the Company brought an action in California against the former Chairman for
breach of the Agreement and which seeks recovery of all stock, warrants and
debt due the Company. The parties are currently conducting settlement
discussions in an attempt to resolve both this litigation and the
following matter ("Other litigation").
OTHER LITIGATION
In December 1997, Elk International Corporation Limited, a stockholder
of the Company, brought an action in Texas against the Company's current
Chairman and an unrelated party, alleging certain misrepresentations during
the merger discussions between XIT and the Company.
(7) PRIVATE PLACEMENT
In June 1998 the Company sold 50 shares of Series A convertible
preferred stock (the "Preferred Shares") at $10,000 per share to one
institutional investor. On July 8, 1998, the Company sold an additional
150 Preferred Shares at the same per share price to two other institutional
investors. Included with the sale of such Preferred Shares were a total of
one million warrants to purchase the Company's common stock exercisable at
$1.25 per share and expiring May 22, 2001. The unaudited proforma June 30,
1998 balance sheet information presented elsewhere herein has been prepared
to reflect the Company's financial position assuming the transactions which
were completed in July 1998 had occurred as of June 30, 1998.
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) PRIVATE PLACEMENT (CONTINUED)
The Company received net proceeds totaling approximately $1,847,000
after deduction of commissions and transaction-related expenses, and
utilized such proceeds for working capital. The Preferred Shares are
convertible into the common stock of the Company at the option of the
holder thereof at any time after the ninetieth (90th) day of issuance
thereof at the conversion price per share of Preferred Share equal to
$10,000 divided by the lesser of (x) $1.25 and (y) One Hundred Percent
(100%) of the arithmetic average of the three lowest closing bid prices
over the forty (40) trading days prior to the exercise date of any such
conversion. No more than 20% of the aggregate number of Preferred Shares
originally purchased and owned by any single entity may be converted in any
thirty (30) day period after the ninetieth (90th) day of issuance. In the
event of any liquidation, dissolution or winding up of the Company, the
holders of shares of Preferred Shares are entitled to receive, prior and in
preference to any distribution of any of the assets of the Company to the
holders of the Company's common stock, an amount per share equal to $10,000
for each outstanding Preferred Share. Any unconverted Preferred Shares may
be redeemed at the option of the Company for cash at a per share price
equal to $11,500 per Preferred Share and any Preferred Shares which remain
outstanding as of May 22, 2003 are subject to mandatory redemption by the
Company at the same per-share redemption price.
(8) NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131")
issued by the FASB is effective for financial statements with fiscal years
beginning after December 15, 1997. The new standard requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate and
their major customers. The Company does not expect adoption of SFAS 131 to
have a material effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132")
issued by the FASB is effective for financial statements with fiscal years
beginning after December 15, 1997 and will require restatement of
disclosures for earlier periods provided for comparative purposes. SFAS
132 standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer considered useful. The Company has not
determined the effect, if any, of adoption of SFAS 132 on its financial
position or results of operations.
-11-
<PAGE>
MICROTEL INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD," "BELIEVE" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL
TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS
STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS
MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS.
As discussed in Note 1 to the consolidated condensed financial statements,
the financial statements presented are those of XIT Corporation ("XIT")
resulting from the reverse acquisition by XIT of MicroTel International, Inc.
(the "Company") and its subsidiaries in a merger on March 26, 1997 (the
"Merger"). The pre-merger Company and "accounting acquiree" is described as CXR
in the discussion below. The Company's Components and Subsystem Assemblies, and
Instrumentation and Test Equipment Sectors are referred to as "the Components
Sector" and "the Test Equipment Sector", respectively, in the discussion below
for brevity.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997
Net sales for the second quarter of 1998 decreased by $3,058,000 or 25%
from those in the same period of the prior year. This decrease resulted
primarily from the inclusion of the operating results of the Company's XCEL
Arnold Circuits, Inc. subsidiary ("XACI") in the second quarter of 1997. The
XACI operating results are not included in the same period in 1998 because
the Company sold XACI effective as of March 31, 1998. XACI represented
approximately $2,680,000 of the decrease and the remainder resulted from
decreases in net sales at the Company's other Circuits sector operations.
Although net sales for the Company's Components sector increased
approximately 7% for the second quarter of 1998 over that of the same period
in 1997 as a result of a combination of both volume and price increases, this
increase was offset by a corresponding decline in net sales of the Test
Equipment sector resulting principally from declines in the sale of
transmission products in the second quarter of 1998 compared with the second
quarter of 1997.
Gross profit, as a percentage of net sales, increased from 26% in the
second quarter of 1997 to 38% in the second quarter of 1998. This increase
resulted primarily from the absence in the second quarter of 1998 of the
negative operating results experienced by XACI in the same period in 1997.
Consequently, the Company's Circuits sector's gross profit rose to 22% of net
sales for the second quarter of 1998 from 7% for the same period in 1997.
Additionally, the Company's Components sector realized an increase in gross
profit as a percentage of net sales to 37% in the second quarter of 1998 versus
28% for the same period in the prior year. This increase resulted from both the
increase in
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<PAGE>
sales noted above, certain price increases instituted by the sector in the
fourth quarter of 1997 and implementation of a marketing strategy designed to
increase sales of higher margin products while concurrently decreasing sales
of products with lower gross profit margins. Gross profit margin as a
percentage of net sales in the Test Equipment sector rose slightly to 45% in
the second quarter of 1998 from 43% in the same period of 1997 as higher margins
from the domestic operation's sale of newer test instruments more than offset
the small decline in gross margin percentage from foreign operations which
experienced an increase in the sale of third-party versus in-house products.
Operating expenses (selling, general and administrative, and engineering
and product development) decreased approximately $970,000 from $4,337,000 in
the second quarter of 1997 to $3,370,000 in the second quarter of 1998. The
principal elements of this decline were: (i) a decrease in 1998 of such
expenses for the Circuits sector of approximately $420,000 resulting from the
absence of such expenses associated with XACI in 1998; (ii) a decrease in
such expenses for the Components sector of approximately $220,000 resulting
from reductions in general and administrative costs across the entire sector
but most significantly in the United Kingdom operations; and (iii) a decrease
in the Test Equipment sector of approximately $330,000 resulting from
reductions in general and administrative costs associated with the relocation
of the Company's CXR Telcom subsidiary to a smaller, more efficient facility
in the fourth quarter of 1997 as well as reduced engineering and product
development expenses.
Selling expenses in all sectors as a percentage of sales were
substantially the same in the second quarter of 1998 compared to the second
quarter of 1997. Total general and administrative expenses decreased by
approximately $540,000 or 26% in the second quarter of 1998 over the same
period in 1997 as a result of cost reductions in the Components sector and
the absence of such expenses for XACI for the second quarter of 1998.
Excluding XACI, general and administrative expenses for the Circuits sector
increased only $20,000 but increased as a percentage of net sales from 10% in
the second quarter of 1997 to 14% in the same period in 1998 as a direct
result of the decline in net sales for the sector. In the Components Sector,
general and administrative expenses decreased by approximately $320,000 and
also decreased as a percentage of net sales from 20% in the second quarter of
1997 to 9% for the same period in 1998 as the sector's operating companies in
the United Kingdom and Japan decreased staffing and facility costs as noted
above. General and administrative expenses for the Test Equipment sector
remained constant at approximately 8.5% of net sales while engineering and
product development expenses declined slightly as a percent of net sales from
14% in the second quarter of 1997 to 12% in the second quarter of 1998 due to
smaller expenditures required by the sector's European operations. Overall
corporate administrative costs were substantially the same in the second
quarter of 1998 compared with the same period in 1997.
Interest expense decreased by $85,000 in the second quarter of 1998
versus the second quarter of 1997 reflecting lower average borrowings during
the 1998 period. Other income (expense) is principally comprised of foreign
currency exchange gains and losses incurred during the respective periods.
As a result of the merger with XIT, the Company experienced a more than
50% ownership change for federal income tax purposes. As a result, an annual
limitation will be placed upon the Company's ability to realize the benefit
of its net operating loss and credit carryforwards. The amount of this
annual limitation, as well as the impact of the application of other possible
limitations under the consolidated return regulations, has not been
definitively determined at this time. Management believes sufficient
uncertainty exists regarding the realizability of the deferred tax asset
items and that a valuation allowance, equal to the net deferred tax asset
amount, is required.
-13-
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 VERSUS JUNE 30, 1997
Net sales for the first six months of 1998 decreased by approximately
$1,020,000 or 5% from those in the same period of the prior year and was
comprised of: (i) a decline in net sales of the Company's Circuits sector of
approximately $3,630,000, of which approximately $3,180,000 resulted from the
inclusion of the operating results of XACI for the entire period in 1997
versus only the first three months of the first half of 1998 as a result of
the sale of XACI which was effective as of March 31, 1998; (ii) a decrease in
net sales of the Company's Components sector of approximately $760,000; and
(iii) an increase in net sales for the Company's Test Equipment sector of
$3,370,000 resulting from the inclusion of CXR for the entire six month
period of 1998 versus only three months and five days during the first half
of 1997 as a result of the Merger. For the first six months of 1998, CXR
experienced an increase in net sales of approximately $375,000 over the same
period in 1997.
Gross profit, as a percentage of net sales, increased from 24% in the
first six months of 1997 to 30% in the same period in 1998. This increase
resulted primarily from the inclusion of the operating results of CXR for the
entire six month period in 1998 versus three months and five days during the
first six months of 1997. In the first half of 1998, CXR contributed
approximately $3,590,000 or 64% of the Company's total gross profit compared
with $2,220,000 or 47% in the first half of 1997. Gross profit, as a
percentage of net sales, in the Company's Circuits and Components sectors
remained essentially constant from the first half of 1997 to 1998 but
decreased by approximately $480,000 resulting from the decrease in net sales
in both sectors as noted above.
Operating expenses (selling, general and administrative, and engineering
and product development) increased $712,000 from $6,347,000 in the first six
months of 1997 to $7,059,000 in the same period of 1998. The principal
element of this increase was the inclusion of the operating results of CXR
for the entire six month period in 1998 versus three months and five days
during the first six months of 1997 partially offset by the absence of such
expenses in the second quarter of 1998 relating to XACI, subsequent to its
sale. Specifically, selling expenses experienced a net increase of
approximately $560,000 in the first half of 1998 over 1997, primarily as the
result of an increase of approximately $890,000 attributable to the inclusion
of CXR and a decrease of approximately $310,000 resulting from the absence
due to the sale of XACI. The increase in general and administrative expense
attributable to the inclusion of CXR for the entire six month period in 1998
was substantially offset by the reduction in such expenses resulting from the
sale of XACI. Engineering and product development expenses increased
approximately $350,000 in 1998 from 1997, substantially all of which was
attributable to the inclusion of CXR for the full six month period in 1998.
Selling expenses as a percentage of sales for the Circuits sector were
substantially the same in the first six month of 1998 compared to the same
period in 1997 while such expenses increased from 4.8% to 7.6% of net sales
from 1997 to 1998 for the Components sector and from 18% to 21% for the Test
Equipment sector as a result of spreading relatively fixed selling costs over
lower net sales. General and administrative expenses decreased approximately
$200,000 in the first six months of 1998 compared with the same period in
1997 principally as a result of a decrease in such expenses for the
Components sector resulting from reductions in such costs across the entire
sector, but most significantly in the United Kingdom operations which reduced
staffing and facilities expenses during the second half of 1997. Excluding
XACI, general and administrative expenses for the Circuits sector increased
only $23,000 but increased as a percentage of net sales from 7% in the first
six months of 1997 to 10% in the same period in 1998 as a direct result of
the decline in net sales for the sector. In the Components Sector, general
and administrative expenses decreased by approximately $590,000 and also
decreased as a percentage of net sales from 18% in the first six months of
1997 compared to 10% for the
-14-
<PAGE>
same period in 1998 as the sector's operating companies in the United Kingdom
and Japan decreased personnel and facility costs as noted above. Corporate
administrative costs increased for the first six months of 1998 increased by
approximately $130,000 over the same period in 1997 resulting principally
from audit and tax return preparation expenses associated with the change in
the Company's fiscal year-end.
Interest expense decreased by $116,000 in the first six months of 1998
versus the same period in 1997 reflecting lower average borrowings during the
1998 period. Other income (expense) is principally comprised of foreign
currency exchange gains and losses incurred during the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $2,260,000 was used in operations in the first six months of
1998 versus cash of $2,766,000 used in operations in the first six months of
1997. The decrease in cash used resulted from improved operating results in
the 1998 period coupled with changes in working capital management during the
respective periods. Significant cash was consumed by XACI to fund continued
operating losses until its sale at the end of the first quarter of 1998.
During the first quarter of 1998, the Company also paid down approximately
$660,000 in accrued expenses and accounts payable in connection with a $2.2
million order received from AT&T in 1997, $1.4 million of which was shipped
in the fourth quarter of 1997. Although collection of accounts receivable
remained stable during the first six months of 1998, at the end of the second
quarter, the Company's accounts receivable rose sharply due to significant
shipments by the Test Equipment sector at quarter-end. Effective as of March
31, 1998, the Company sold XACI, its principal circuits subsidiary, and in
early April, received $1,350,000 in cash and a note for $650,000 upon the
closing of the sale in early April. The cash received was utilized to reduce
certain long and short-term bank borrowings and other current debt.
The Company's XIT subsidiary had a line of credit with a bank (the "XIT
Debt") which provided for maximum borrowings of $3,500,000 collateralized by
substantially all assets of XIT and its domestic subsidiaries with interest
at the bank's prime rate (8.5% at June 30, 1998) plus 1%. The XIT Debt
agreement required maintenance of certain financial ratios and contained
other restrictive covenants. XIT was not in compliance with certain
covenants of the XIT Debt agreement at December 31, 1997 and at June 30,
1998. Although the bank did not waive compliance with such debt covenants,
it entered into a forbearance agreement with the Company in which it agreed
to forbear from exercising its rights under the terms of the XIT Debt
agreement provided the Company obtain a replacement credit facility.
On July 8, 1998, the Company finalized a $10.5 million credit facility
with a commercial finance company which provided a term loan of approximately
$1.5 million and a revolving line of credit of up to $8 million based upon
assets available from either existing or future-acquired operations, of which
the Company has utilized approximately $4 million, and a capital equipment
expenditure credit line of up to $1 million. This credit facility replaced
the existing credit facilities of the Company's domestic operating companies,
which included the XIT Debt and CXR Telcom Corporation's line of credit, both
of which were paid in full at the closing, and provides expanded borrowing
capability based upon available assets.
-15-
<PAGE>
In June 1998, the Company sold 50 shares of Series A convertible
preferred stock (the "Preferred Shares") at $10,000 per share to one
institutional investor. On July 8, 1998, the Company sold an additional 150
Preferred Shares at the same per share price to two other institutional
investors. Included with the sale of such Preferred Shares were a total of
one million warrants to purchase the Company's common stock exercisable at
$1.25 per share and expiring May 22, 2001. The unaudited proforma June 30,
1998 balance sheet information presented elsewhere herein has been prepared
to reflect the Company's financial position assuming the transactions which
were completed in July 1998 had occurred as of June 30, 1998. In total, the
Company received net proceeds of approximately $1,847,000 after deduction of
commissions and transaction-related expenses and utilized such proceeds for
working capital. The Preferred Shares are convertible into the common stock
of the Company (see Note 7 to the Consolidated Condensed Financial Statements
included elsewhere in this report).
YEAR 2000 ISSUE
The Company continues to assess the impact, if any, of the Year 2000
issue on its computer applications and operating systems, products and
interactions with third parties. At its domestic facilities, the Company is
currently installing accounting and operations management computer
applications which are year 2000 compliant and which operate on computer
operating systems which are also year 2000 compliant. The Company estimates
that the completion of its conversion to such computer systems will occur
during 1999. The Company did not initiate such changes in application and
operating software systems in order to accommodate the year 2000 issue but
rather to upgrade and enhance its management information systems capability.
As a part of its selection criteria, the Company considered the impact of the
year 2000 issue. While the Company currently believes that the impact of the
change to the year 2000 will not have a material effect on the Company's
operations or financial condition, its assessment of this issue is not yet
complete and therefore some uncertainty exists as to whether material year
2000 issues exist.
LEGAL PROCEEDINGS
There are four legal proceedings pending against the Company (see Note 6
to the Consolidated Condensed Financial Statements included elsewhere in this
report). Management believes that the outcome of these pending proceedings
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
OUTLOOK
From the Merger at the end of March 1997 through early July 1998, the
Company directed its attention to stabilizing its financial condition and
improving its operating results. In addition, during the second half of
1997 and the first quarter of 1998, the Company expended considerable
management time and effort to divest itself of the XACI operation which, due
to its substantial operating losses, severely constricted the Company's cash
position. The Company's failure to maintain the requisite financial position
and consequential default on its major bank debt financing agreement, which
was eliminated in early July by the consolidated credit facility referenced
above, resulted principally from the operating losses incurred at XACI. The
time and effort to manage that situation coupled with efforts to obtain a
replacement credit facility absorbed considerable management attention.
Nonetheless, with one exception, all operating units attained profitability
in the second quarter of 1998.
-16-
<PAGE>
Additionally, the Company added $1.8 million in cash from the
private equity placement referenced above. The Company believes these
achievements position it to continue to improve its operating results during
the remainder of 1998.
The Company's overall strategy is to expand its Test Equipment sector
through the acquisition and/or development of new products, product lines
and/or separate operating companies while concurrently continuing to evaluate
existing lower-margin or loss operations elsewhere throughout the Company
with a view toward divestment so as to redirect capital to the higher margin
Test Equipment sector. In addition, the Company will continue to seek to
maximize short to intermediate term profitability on existing maturing
product lines in all sectors through price increases and lower operating
costs. Over the last nine months, the Test Equipment sector in the United
States market has successfully acquired and integrated the products of a
state-of-the-art, customer-premises test equipment manufacturer located in St.
Charles, Illinois. The acquired products have replaced existing, aged
products and, in a short period of time, have become a significant portion of
the net sales of the US operation. Production of this product line has been
transferred to and consolidated with the CXR Telcom facility in Fremont,
California and the St. Charles facility has been repositioned as an
engineering, R&D and customer support center. Additionally, the French Test
Equipment subsidiary has begun to market a broader range of test,
transmission and networking products sourced through licensing, reseller and
other agreements. These actions, in conjunction with the reduction of lower
margin Circuits sector business and the restructured marketing focus in the
Components sector on higher margin products, has resulted in the Company
reducing its net loss in the first quarter of 1998 from approximately
$950,000 to just over $200,000 in the second quarter of 1998. The Company
believes continued improvement in operating results will continue in the
third quarter despite this traditionally weak summer period in the Test
Equipment sector - particularly in European - as demand for product in the
other sectors remains stable.
In the US Test Equipment Sector, the recent completion of mergers of
various Regional Bell Operating Companies is beginning to produce new
opportunities. The consolidation of Southwest Bell and Pacific Bell now
appears complete and release of equipment purchases is once again beginning
to return to traditional levels. Although the NYNEX and Bell Atlantic merger
had initially created some uncertainty and delayed capital equipment
purchases, this merger now affords the Company the opportunity to provide the
combined entity with the Company's newer test equipment products. Domestic
sales of transmission products are expected to improve with the introduction
of Remote Access Server products for Internet applications as well as trial
systems for other transmission products which are currently in place.
Additionally, in-house efforts are being directed toward developing software
which will allow the recently acquired test equipment products to be marketed
in both the Pacific Rim and Latin America.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The Company does not expect adoption of SFAS 131 to have a
material effect on its financial position or results of operations.
-17-
<PAGE>
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132")
issued by the FASB is effective for financial statements with fiscal years
beginning after December 15, 1997 and will require restatement of disclosures
for earlier periods provided for comparative purposes. SFAS 132 standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
considered useful. The Company has not determined the effect, if any, of
adoption of SFAS 132 on its financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 - Litigation in the accompanying Notes to Unaudited Consolidated
Condensed Financial Statements; Part II, Item 1 of the Registrant's
Quarterly Report on Form 10-Q filed on May 15, 1998; and, Legal Proceedings
section of Item 3 of the Registrant's Annual Report on Form 10-K filed on
April 15, 1998 for a description of previously reported proceedings.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) During June and July 1998, the Company, through its Placement Agent
Pacific Continental Securities Corporation, completed the sale to
three institutional investors of 200 shares of Series A convertible
preferred stock (the "Preferred Shares") at $10,000 per share and
one million warrants to purchase the Company's common stock
exercisable at $1.25 per share, expiring May 22, 2001. The
offering was completed on July 8, 1998 and the Company received net
proceeds of approximately $1,847,000 after deduction of commissions
and transaction-related expenses and utilized such proceeds for
working capital. The Preferred Shares are convertible into the
common stock of the Company at the option of the holder thereof at
any time after the ninetieth (90th) day of issuance thereof at the
conversion price per share of Preferred Share equal to $10,000
divided by the lesser of (x) $1.25 and (y) One Hundred Percent
(100%) of the arithmetic average of the three lowest closing bid
prices over the forty (40) trading days prior to the exercise date
of any such conversion. No more than 20% of the aggregate number
of Preferred Shares originally purchased and owned by any single
may be converted in any thirty (30) day period after the ninetieth
(90th) day of issuance. In the event of any liquidation,
dissolution or winding up of the Company, the holders of shares of
Preferred Shares are entitled to receive, prior and in preference
to any distribution of
-18-
<PAGE>
any of the assets of this corporation to the holders of the
company's common stock by reason of their ownership, an amount per
share equal to $10,000 for each outstanding Preferred Share. Any
unconverted Preferred Shares may be redeemed at the option of the
Company for cash at a per share price equal to $11,500 per
Preferred Share and any Preferred Shares which remain outstanding
as of May 22, 2003 are subject to mandatory redemption by the
Company at the same per-share redemption price.
(d) Not applicable.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On June 11, 1998, the Company held its Annual Meeting of Stockholders.
Matters voted on and results of the voting were as follows:
A. Election of Directors:
<TABLE>
<CAPTION>
Name Class Votes Received Votes Withheld
---- ----- -------------- --------------
<S> <C> <C> <C>
David A. Barrett I 7,541,152 39,515
Laurence P. Finnegan, Jr. II 7,541,281 39,386
Jack Talan II 3,966,229 3,614,438
</TABLE>
Carmine T. Oliva and Robert Runyon are Class III directors whose term of
office expires at the Company's Annual Meeting of Stockholders in 1999.
Adoption of the Company's 1997 Stock Incentive Plan:
<TABLE>
<CAPTION>
For Against Abstain Not Voted
--- ------- ------- ---------
<S> <C> <C> <C>
4,264,393 340,971 614,870 2,360,433
</TABLE>
C. Ratification of Selection by the Board of Directors of BDO Seidman,
LLP as Independent Accountants:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
7,428,243 13,001 139,423
</TABLE>
Item 5. Other Information
None.
-19-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Description
Number -----------
------
<S> <C>
10.47 Loan and Security Agreement between Congress Financial
Corporation (Western) and MicroTel International, Inc., XIT
Corporation, CXR Telcom Corporation and HyComp, Inc. dated June
23, 1998.
10.48 Security Agreement between Congress Financial Corporation
(Western) and XIT Corporation dated June 23, 1998.
10.49 Subscription Agreement for the sale of Series A Convertible
Preferred Stock of MicroTel International, Inc. to Fortune Fund
Limited Seeker III.
10.50 Subscription Agreement for the sale of Series A Convertible
Preferred Stock of MicroTel International, Inc. to Rana General
Holding, Ltd.
10.51 Subscription Agreement for the sale of Series A Convertible
Preferred Stock of MicroTel International, Inc. to Resonace Ltd.
10.52 Form of Warrant to purchase the Common Stock of MicroTel
International, Inc. issued in connection with the sale of Series
A Convertible Preferred Stock..
10.53 Amended Certificate of Designations, Preferences and Rights of
Preferred Stock of MicroTel International, Inc. a Delaware
Corporation.
10.54 Employment Agreement between MicroTel International, Inc. and
James P. Butler dated May 1, 1998.
27 Unaudited Financial Data Schedule for the six months ended June 30,
1998.
</TABLE>
(b) Reports on Form 8-K:
Reports on Form 8-K were filed as follows:
(1) Dated April 9, 1998 under Item 2. Acquisition and Disposition of
Assets was filed on April 4, 1997 and subsequently amended on
Form 8-KA filed June 3, 1998.
(2) Dated July 8, 1998 under Item 5. Other Events was filed on July
30, 1998.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MicroTel International, Inc.
August 13, 1998 /s/ Carmine T. Oliva
-------------------------------
Carmine T. Oliva
Chief Executive Officer
(Principal Executive Officer)
/s/ James P. Butler
-------------------------------
James P. Butler
Chief Financial Officer
(Principal Accounting and Financial Officer)
-21-
<PAGE>
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
CONGRESS FINANCIAL CORPORATION (WESTERN)
AS LENDER
AND
MICROTEL INTERNATIONAL, INC.
XIT CORPORATION
CXR TELCOM CORPORATION
AND
HYCOMP, INC.
AS BORROWER
DATED: JUNE 23, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
PAGE(S)
-------
<S> <C> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. CREDIT FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Revolving Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Letter of Credit Accommodations. . . . . . . . . . . . . . . . . . 9
2.3 Term Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.4 Cap Ex Loans . . . . . . . . . . . . . . . . . . . . . . . . . . .11
SECTION 3. INTEREST AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
3.2 Closing Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
3.3 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . .13
3.4 Servicing Fee. . . . . . . . . . . . . . . . . . . . . . . . . . .13
3.5 Unused Line Fee. . . . . . . . . . . . . . . . . . . . . . . . . .13
3.6 Compensation Adjustment. . . . . . . . . . . . . . . . . . . . . .13
SECTION 4. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . . . .14
1.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations . . . . . . . . . . . . . . . . . . . . . . . . . .14
1.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations . . . . . . . . . . . . . . . . . . . . . . . . . .16
SECTION 5. GRANT OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . . . .16
SECTION 6. COLLECTION AND ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . .17
6.1 Borrower's Loan Account. . . . . . . . . . . . . . . . . . . . . .17
6.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
6.3 Collection of Accounts . . . . . . . . . . . . . . . . . . . . . .17
6.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
6.5 Authorization to Make Loans. . . . . . . . . . . . . . . . . . . .19
6.6 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . .19
SECTION 7. COLLATERAL REPORTING AND COVENANTS. . . . . . . . . . . . . . . . . . . .19
7.1 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . . .19
7.2 Accounts Covenants . . . . . . . . . . . . . . . . . . . . . . . .19
7.3 Inventory Covenants. . . . . . . . . . . . . . . . . . . . . . . .21
7.4 Equipment Covenants. . . . . . . . . . . . . . . . . . . . . . . .21
7.5 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . .22
7.6 Right to Cure. . . . . . . . . . . . . . . . . . . . . . . . . . .22
7.7 Access to Premises . . . . . . . . . . . . . . . . . . . . . . . .22
SECTION 8. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . .23
8.1 Corporate Existence, Power and Authority; Subsidiaries . . . . . .23
8.2 Financial Statements; No Material Adverse Change . . . . . . . . .23
8.3 Chief Executive Office; Collateral Locations . . . . . . . . . . .23
8.4 Priority of Liens; Title to Properties . . . . . . . . . . . . . .23
8.5 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . .24
8.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
8.7 Compliance with Other Agreements and Applicable Laws . . . . . . .24
i
<PAGE>
PAGE(S)
------
8.8 Environmental Compliance . . . . . . . . . . . . . . . . . . . . .24
8.9 Employee Benefits... . . . . . . . . . . . . . . . . . . . . . . .25
8.10 Accuracy and Completeness of Information . . . . . . . . . . . . .25
8.11 Survival of Warranties; Cumulative . . . . . . . . . . . . . . . .25
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . .26
9.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . .26
9.2 New Collateral Locations . . . . . . . . . . . . . . . . . . . . .26
9.3 Compliance with Laws, Regulations. . . . . . . . . . . . . . . . .26
9.4 Payment of Taxes and Claims. . . . . . . . . . . . . . . . . . . .27
9.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
9.6 Financial Statements and Other Information . . . . . . . . . . . .28
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. . . . . .29
9.8 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . .29
9.9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . .29
9.10 Loans, Investments, Guarantees, Etc. . . . . . . . . . . . . . . .30
9.11 Dividends and Redemptions. . . . . . . . . . . . . . . . . . . . .30
9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . .30
9.13 Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . . .30
9.14 Adjusted Net Worth . . . . . . . . . . . . . . . . . . . . . . . .30
9.15 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . . .30
9.16 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . .31
9.17 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . .31
SECTION 10. EVENTS OF DEFAULT AND REMEDIES. . . . . . . . . . . . . . . . . . . . . .32
10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . .32
10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND
CONSENTS; GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . .34
11.1 Governing Law; Choice of Forum; Service of Process;
Jury Trial Waiver. . . . . . . . . . . . . . . . . . . . . . . . .34
11.2 Waiver of Notices. . . . . . . . . . . . . . . . . . . . . . . . .35
11.3 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . .35
11.4 Waiver of Counterclaims. . . . . . . . . . . . . . . . . . . . . .36
11.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . .36
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . .36
12.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
12.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
12.3 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . .37
12.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
12.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . .38
</TABLE>
ii
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
iii
<PAGE>
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated June 23, 1998 is entered into by and
between Congress Financial Corporation (Western), a California corporation
("Lender") and Microtel International, Inc. ("Microtel"), a Delaware
corporation, XIT Corporation ("XIT"), a New Jersey Corporation, CXR Telcom
Corporation ("CXR"), a Delaware corporation, and Hycomp, Inc. ("Hycomp"), a
Massachusetts corporation. (Microtel, XIT, CXR and Hycomp are sometimes
referred to in this Agreement, jointly and severally, as the "Borrower".)
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS.
All terms used herein which are defined in Article 1 or Article 9 of the
California Uniform Commercial Code shall have the respective meanings given
therein unless otherwise defined in this Agreement. All references to the
plural herein shall also mean the singular and to the singular shall also mean
the plural. All references to Borrower and Lender pursuant to the definitions
set forth in the recitals hereto, or to any other person herein, shall include
their respective successors and assigns. The words "hereof", "herein",
"hereunder", "this Agreement" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. An
Event of Default shall exist or continue or be continuing until such Event of
Default is waived in accordance with Section 11.3. Any accounting term used
herein unless otherwise defined in this Agreement shall have the meaning
customarily given to such term in accordance with GAAP. For purposes of this
Agreement, the following terms shall have the respective meanings given to them
below:
1.1 "ACCOUNTS" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "ADJUSTED NET WORTH" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its subsidiaries (if any, but not
including foreign subsidiaries), the amount equal to: (a) the difference
between: (i) the aggregate net book value of all assets of such Person and its
subsidiaries, calculating the book value of inventory for this purpose on a
first-in-first-out basis,
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after deducting from such book values all appropriate reserves in accordance
with GAAP (including all reserves for doubtful receivables, obsolescence,
depreciation and amortization) and (ii) the aggregate amount of the
indebtedness and other liabilities of such Person and its subsidiaries
(including tax and other proper accruals) PLUS (b) indebtedness of such
Person and its subsidiaries which is subordinated in right of payment to the
full and final payment of all of the Obligations on terms and conditions
acceptable to Lender.
1.3 "AVAILABILITY RESERVES" shall mean, as of any date of determination,
such amounts as Lender may from time to time establish and revise in good faith
reducing the amount of Revolving Loans and Letter of Credit Accommodations which
would otherwise be available to Borrower under the lending formula(s) provided
for herein: (a) to reflect events, conditions, contingencies or risks which, as
determined by Lender in good faith, do or may affect either (i) the Collateral
or any other property which is security for the Obligations or its value
(including without limitation any increase in any dilution with respect to the
Accounts of any Borrower), (ii) the assets, business or prospects of Borrower or
any Obligor or (iii) the security interests and other rights of Lender in the
Collateral (including the enforceability, perfection and priority thereof) or
(b) to reflect Lender's good faith belief that any collateral report or
financial information furnished by or on behalf of Borrower or any Obligor to
Lender is or may have been incomplete, inaccurate or misleading in any material
respect or (c) to reflect any state of facts which Lender determines in good
faith constitutes an Event of Default or may, with notice or passage of time or
both, constitute an Event of Default. Without limiting the generality of the
foregoing, Lender (i) shall establish on the date hereof and maintain throughout
the term of this Agreement and throughout any renewal term an Availability
Reserve for an amount equal to three (3) months of Borrower's gross rent and
other obligations as lessee for each leased premises of Borrower which is
located in a state where a landlord may be entitled to a priority lien on
Collateral to secure unpaid rent and with respect to each such property the
landlord has not executed a form of waiver and consent acceptable to Lender,
(ii) may establish an additional Availability Reserve on the date hereof, and
from time to time hereafter, and maintain such reserve throughout the term of
this Agreement and throughout any renewal term in an amount determined by Lender
in its discretion to be sufficient to cover the anticipated moving expenses and
other costs associated with the transfer of Inventory from each of Borrower's
locations to another location acceptable to Lender, and (iii) may establish and
maintain an additional Availability Reserve from time to time to compensate for
types of Inventory in an amount equal to more than the sales of such Inventory
during the prior 18 months.
1.4 "BLOCKED ACCOUNT" shall have the meaning set forth in Section 6.3
hereof.
1.5 "BUSINESS DAY" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York, the Commonwealth of Pennsylvania or the State
of California, and a day on which First Union National Bank or such other bank
as Lender may from time to time designate, and Lender are open for the
transaction of business.
1.6 "CODE" shall mean the Internal Revenue Code of 1986, as the same now
exists or may from time to time hereafter be amended, modified, recodified or
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
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1.7 "COLLATERAL" shall have the meaning set forth in Section 5 hereof.
1.8 "ELIGIBLE ACCOUNTS" shall mean Accounts created by Borrower which are
and continue to be acceptable to Lender based on the criteria set forth below.
In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and BONA FIDE sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than 60 days after their
original due date or more than 90 days after the date of the original invoice
for them;
(c) such Accounts comply with the terms and conditions contained in
Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment, guaranteed
sale, sale and return, sale on approval, or other terms under which payment by
the account debtor may be conditional or contingent;
(e) the chief executive office of the account debtor with respect to
such Accounts is located in the United States of America or Canada, or, at
Lender's option, if either: (i) the account debtor has delivered to Borrower an
irrevocable letter of credit issued or confirmed by a bank in the United States
satisfactory to Lender, sufficient to cover such Account, payable in the United
States of America and in U.S. Dollars, in form and substance satisfactory to
Lender and, if required by Lender, the original of such letter of credit has
been delivered to Lender or Lender's agent and the issuer thereof notified of
the assignment of the proceeds of such letter of credit to Lender, or (ii) such
Account is subject to credit insurance payable to Lender issued by an insurer
and on terms and in an amount acceptable to Lender, or (iii) such Account is
otherwise acceptable in all respects to Lender including, but not limited to,
the creditworthiness of the account debtor and the political risk associated
therewith, and the ability of the Lender to collect the foreign Account, subject
to such lending formulas with respect to each foreign Account as Lender may
determine, and each such foreign Account is payable to Borrower at a location in
the United States of America and in U.S. Dollars;
(f) such Accounts do not consist of progress billings, bill and hold
invoices or retainage invoices, except as to bill and hold invoices, if Lender
shall have received an agreement in writing from the account debtor, in form and
substance satisfactory to Lender, confirming the unconditional obligation of the
account debtor to take the goods related thereto and pay such invoice;
(g) the account debtor with respect to such Accounts has not asserted
a counterclaim, defense or dispute and does not have, and does not engage in
transactions which may give rise to, any right of setoff against such Accounts;
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<PAGE>
(h) there are no facts, events or occurrences which would impair the
validity, enforceability or collectability of such Accounts or reduce the amount
payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee or agent of
or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
(k) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
(l) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(m) such Accounts of a single account debtor or its affiliates do not
constitute more than twenty percent (20%) of all otherwise Eligible Accounts
(but the portion of the Accounts not in excess of such percentage may be deemed
Eligible Accounts);
(n) such Accounts are not owed by an account debtor who has Accounts
unpaid more than 60 days after their original due date or more than 90 days
after the date of the original invoice for them which constitute more than fifty
percent (50%) of the total Accounts of such account debtor;
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Lender from time to time (but the portion of
the Accounts not in excess of such credit limit may still be deemed Eligible
Accounts); and
(p) such Accounts are owed by account debtors deemed creditworthy at
all times by Lender, as determined by Lender.
General criteria for Eligible Accounts may be established and revised from
time to time by Lender in good faith. Any Accounts which are not Eligible
Accounts shall nevertheless be part of the Collateral.
1.9 "ELIGIBLE INVENTORY" shall mean Inventory consisting of
finished goods held for resale in the ordinary course of the business of
Borrower and raw materials for such finished
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<PAGE>
goods which are acceptable to Lender based on the criteria set forth below.
In general, Eligible Inventory shall not include (a) work-in-process; (b)
components which are not part of finished goods; (c) spare parts for
equipment; (d) packaging and shipping materials; (e) supplies used or
consumed in Borrower's business; (f) Inventory at premises other than those
owned and controlled by Borrower, except if Lender shall have received an
agreement in writing from the person in possession of such Inventory and/or
the owner or operator of such premises in form and substance satisfactory to
Lender acknowledging Lender's first priority security interest in the
Inventory, waiving security interests and claims by such person against the
Inventory and permitting Lender access to, and the right to remain on, the
premises so as to exercise Lender's rights and remedies and otherwise deal
with the Collateral; (g) Inventory in-transit; (h) Inventory subject to a
security interest or lien in favor of any person other than Lender except
those permitted in this Agreement; (i) bill and hold goods; (j)
unserviceable, obsolete or slow moving Inventory; (k) Inventory which is not
subject to the first priority, valid and perfected security interest of
Lender; (l) returned, damaged and/or defective Inventory; and (m) Inventory
purchased or sold on consignment. General criteria for Eligible Inventory
may be established and revised from time to time by Lender in good faith.
Any Inventory which is not Eligible Inventory shall nevertheless be part of
the Collateral.
1.10 "ENVIRONMENTAL LAWS" shall mean all federal, state, district, local
and foreign laws, rules, regulations, ordinances, and consent decrees relating
to health, safety, hazardous substances, pollution and environmental matters, as
now or at any time hereafter in effect, applicable to Borrower's business and
facilities (whether or not owned by it), including laws relating to emissions,
discharges, releases or threatened releases of pollutants, contamination,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes into
the environment (including, without limitation, ambient air, surface water,
ground water, land surface or subsurface strata) or otherwise relating to the
generation, manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, chemicals, or
hazardous, toxic or dangerous substances, materials or wastes.
1.11 "EQUIPMENT" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.12 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.13 "ERISA AFFILIATE" shall mean any person required to be aggregated with
Borrower or any of its affiliates under Sections 414(b), 414(c), 414(m) or
414(o) of the Code.
1.14 "EVENT OF DEFAULT" shall mean the occurrence or existence of any event
or condition described in Section 10.1 hereof.
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<PAGE>
1.15 "EXCESS AVAILABILITY" shall mean the amount, as determined by Lender,
calculated at any time, equal to: (a) the lesser of: (i) the amount of the
Revolving Loans available to Borrower as of such time based on the applicable
lender formulas multiplied by the Net Amount of Eligible Accounts and the Value
of Eligible Inventory, as determined by Lender, and subject to the sublimits and
Availability Reserves from time to time established by Lender hereunder, and
(ii) the Maximum Credit (less the then outstanding principal amount of the Term
Loan), MINUS (b) the sum of: (i) the amount of all then outstanding and unpaid
Obligations (but not including for this purpose the then outstanding principal
amount of the Term Loan), (ii) the aggregate amount of all then outstanding and
unpaid trade payables of Borrower which are more than sixty (60) days past due
as of such time, (iii) the aggregate amount of Borrower's book overdrafts, and
(iv) the aggregate amount of Borrower's past due lease and notes payable.
1.16 "FINANCING AGREEMENTS" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any Obligor in connection with this Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
1.17 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Sections 9.13 and 9.14 hereof, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
1.18 "HAZARDOUS MATERIALS" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including, without limitation, hydrocarbons
(including naturally occurring or man-made petroleum and hydrocarbons),
flammable explosives, asbestos, urea formaldehyde insulation, radioactive
materials, biological substances, polychlorinated biphenyls, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants
(including, without limitation, materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are or become regulated under any Environmental Law (including, without
limitation any that are or become classified as hazardous or toxic under any
Environmental Law).
1.19 "INFORMATION CERTIFICATE" shall mean the Information Certificate of
Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.20 "INVENTORY" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
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1.21 "LETTER OF CREDIT ACCOMMODATIONS" shall mean the letters
of credit, merchandise purchase or other guaranties which are from time to
time either (a) issued, opened or provided by Lender for the account of
Borrower or any Obligor or (b) with respect to which Lender has agreed to
indemnify the issuer or guaranteed to the issuer the performance by Borrower
of its obligations to such issuer.
1.22 "LOANS" shall mean the Revolving Loans, the Cap Ex Loans
and the Term Loan.
1.23 "MAXIMUM CREDIT" shall mean the amount of $10,500,000.
1.24 "NET AMOUNT OF ELIGIBLE ACCOUNTS" shall mean the gross
amount of Eligible Accounts less (a) sales, excise or similar taxes included
in the amount thereof and (b) returns, discounts, claims, credits and
allowances of any nature at any time issued, owing, granted, outstanding,
available or claimed with respect thereto.
1.25 "OBLIGATIONS" shall mean any and all Revolving Loans, the
Cap Ex Loans, the Term Loan, Letter of Credit Accommodations and all other
obligations, liabilities and indebtedness of every kind, nature and
description owing by Borrower to Lender and/or its affiliates, including
principal, interest, charges, fees, costs and expenses, however evidenced,
whether as principal, surety, endorser, guarantor or otherwise, whether
arising under this Agreement or otherwise, whether now existing or hereafter
arising, whether arising before, during or after the initial or any renewal
term of this Agreement or after the commencement of any case with respect to
Borrower under the United States Bankruptcy Code or any similar statute
(including, without limitation, the payment of interest and other amounts
which would accrue and become due but for the commencement of such case),
whether direct or indirect, absolute or contingent, joint or several, due or
not due, primary or secondary, liquidated or unliquidated, secured or
unsecured, and however acquired by Lender.
1.26 "OBLIGOR" shall mean any guarantor, endorser, acceptor,
surety or other person liable on or with respect to the Obligations or who is
the owner of any property which is security for the Obligations, other than
Borrower.
1.27 "PARTICIPANT" shall mean any person which at any time
participates with Lender in respect of the Loans, the Letter of Credit
Accommodations or other Obligations or any portion thereof.
1.28 "PAYMENT ACCOUNT" shall have the meaning set forth in
Section 6.3 hereof.
1.29 "PERSON" or "PERSON" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code
of 1986, as amended), business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.30 "PRIME RATE" shall mean the rate from time to time
publicly announced by First Union National Bank or its successors, at its
office in Philadelphia, Pennsylvania, as its prime rate, whether or not such
announced rate is the best rate available at such bank.
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<PAGE>
1.31 "RECORDS" shall mean all of Borrower's present and future
books of account of every kind or nature, purchase and sale agreements,
invoices, ledger cards, bills of lading and other shipping evidence,
statements, correspondence, memoranda, credit files and other data relating
to the Collateral or any account debtor, together with the tapes, disks,
diskettes and other data and software storage media and devices, file
cabinets or containers in or on which the foregoing are stored (including any
rights of Borrower with respect to the foregoing maintained with or by any
other person).
1.32 "REVOLVING LOANS" shall mean the loans now or hereafter
made by Lender to or for the benefit of Borrower on a revolving basis
(involving advances, repayments and readvances) as set forth in Section 2.1
hereof.
1.33 "TERM LOAN" shall mean collectively the term loans made
by Lender to Borrower as provided for in Section 2.3 hereof.
1.34 "VALUE" shall mean, as determined by Lender in good
faith, with respect to Inventory, the lower of (a) cost computed on a
first-in-first-out basis in accordance with GAAP or (b) market value.
SECTION 2. CREDIT FACILITIES.
2.1 REVOLVING LOANS.
(a) Subject to, and upon the terms and conditions
contained herein, Lender agrees to make Revolving Loans to Borrower from time
to time in amounts requested by Borrower up to the amount equal to the sum
of:
(i) EIGHTY-FIVE PERCENT (85%) of the Net Amount of
Eligible Accounts, plus
(ii) the lesser of:
(A) the sum of FORTY PERCENT (40%) of the Value
of Eligible Inventory consisting of finished goods plus
TWENTY-FIVE PERCENT (25%) of the Value of Eligible Inventory
consisting of raw materials for such finished goods, or
(B) the amount equal to: (1) $500,000 minus
FORTY PERCENT (40%) of the then undrawn amounts of the
outstanding Letter of Credit Accommodations for the purpose of
purchasing finished goods, plus (2) $1,000,000 minus
TWENTY-FIVE PERCENT (25%) of the then undrawn amounts of the
outstanding Letter of Credit Accommodations for the purpose of
purchasing raw materials for such finished goods, less
(iii) any Availability Reserves;
PROVIDED THAT:
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(1) Total Revolving Loans to all Borrowers shall not at any
time exceed $9,000,000;
(2) Total Loans to all Borrowers with respect to finished
goods shall not exceed $500,000 at any time outstanding;
(3) Total Loans to all Borrowers with respect to raw
materials shall not exceed $1,000,000 at any time outstanding;
(4) Borrower shall have the right, not more frequently
than once per fiscal year, to have the Eligible Inventory
appraised by an appraiser acceptable to Lender in its sole
discretion, at Borrower's expense, and to have the percentages
set forth in Section 2.1.(a)(ii)(A) and (B) adjusted to the
lesser of 80% of the orderly liquidation value of such
Eligible Inventory as determined by said appraiser, or 100% of
the auction value of such Eligible Inventory as determined by
said appraiser, in each case net of Lender's estimate as to
the costs and expenses of sale of such Eligible Inventory in
an auction or orderly liquidation.
Revolving Loans will be made separately to each Borrower based on the
Eligible Accounts and Eligible Inventory of each Borrower, but subject to the
dollar limits set forth above, which shall apply to the total Revolving Loans
to all Borrowers.
(b) Lender may, in its discretion, from time to time,
upon not less than five (5) days prior notice to Borrower, (i) reduce the
lending formula with respect to Eligible Accounts to the extent that Lender
determines in good faith that: (A) the dilution with respect to the Accounts
for any period (based on the ratio of (1) the aggregate amount of reductions
in Accounts other than as a result of payments in cash to (2) the aggregate
amount of total sales) has increased in any material respect or may be
reasonably anticipated to increase in any material respect above historical
levels, or (B) the general creditworthiness of account debtors has declined
or (ii) reduce the lending formula(s) with respect to Eligible Inventory to
the extent that Lender determines that: (A) the number of days of the
turnover, or the mix, of the Inventory for any period has changed in any
material respect or (B) the liquidation value of the Eligible Inventory, or
any category thereof, has decreased, or (C) the nature and quality of the
Inventory has deteriorated in any material respect. In determining whether
to reduce the lending formula(s), Lender may consider events, conditions,
contingencies or risks which are also considered in determining Eligible
Accounts, Eligible Inventory or in establishing Availability Reserves.
(c) Except in Lender's discretion, the aggregate amount
of the Loans, the Letter of Credit Accommodations and other Obligations
outstanding at any time shall not exceed the Maximum Credit. In the event
that the outstanding amount of any component of the Loans, or the aggregate
amount of the outstanding Loans, Letter of Credit Accommodations and other
Obligations exceed the amounts available under the lending formulas set forth
in Section 2.1(a) hereof, the sublimits for Letter of Credit Accommodations
set forth in Section 2.2(c) or the Maximum Credit, as applicable, such event
shall not limit, waive or otherwise affect any rights of Lender in that
circumstance or on any future occasions and Borrower shall, upon demand by
Lender, which may be made at any time or from time to time, immediately repay
to Lender the entire amount of any such excess(es) for which payment is
demanded.
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(d) Without limiting any of the other provisions of this
Agreement, all payments of principal and interest and all other sums received
by Borrower under that certain promissory note dated March 31, 1998 in the
original principal amount of $650,000, which Borrower represents has an
unpaid principal balance of $650,000, made by Arnold Circuits, Inc. (the
"Arnold's Note") shall be remitted by Borrower to Lender to be applied to the
Revolving Loans.
2.2 LETTER OF CREDIT ACCOMMODATIONS.
(a) Subject to, and upon the terms and conditions
contained herein, at the request of Borrower, Lender agrees to provide or
arrange for Letter of Credit Accommodations for the account of Borrower
containing terms and conditions acceptable to Lender and the issuer thereof.
Any payments made by Lender to any issuer thereof and/or related parties in
connection with the Letter of Credit Accommodations shall constitute
additional Revolving Loans to Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged
by any bank or issuer in connection with the Letter of Credit Accommodations,
Borrower shall pay to Lender a letter of credit fee at a rate equal to ONE
PERCENT (1%) per annum on the daily outstanding balance of the Letter of
Credit Accommodations for the immediately preceding month (or part thereof),
payable in arrears as of the first day of each succeeding month; PROVIDED,
HOWEVER, that such letter of credit fee shall be increased, at Lender's
option, without notice, to three percent (3%) per annum for the period on or
after the date of termination or non-renewal of this Agreement, or the date
of the occurrence of an Event of Default. Such letter of credit fee shall be
calculated on the basis of a three hundred sixty (360) day year and actual
days elapsed and the obligation of Borrower to pay such fee shall survive the
termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be
available unless on the date of the proposed issuance of any Letter of Credit
Accommodations, the Revolving Loans available to Borrower (subject to the
Maximum Credit and any Availability Reserves) are equal to or greater than:
(i) if the proposed Letter of Credit Accommodation is for the purpose of
purchasing Eligible Inventory, the sum of (A) the product of the Value of
such Eligible Inventory multiplied by an amount equal to one minus the then
applicable Inventory advance rate under Section 2.1(a)(ii), plus (B) freight,
taxes, duty and other amounts which Lender estimates must be paid in
connection with such Inventory upon arrival and for delivery to one of
Borrower's locations for Eligible Inventory within the United States of
America and (ii) if the proposed Letter of Credit Accommodation is for
standby letters of credit guaranteeing the purchase of Eligible Inventory or
for any other purpose, an amount equal to one hundred percent (100%) of the
face amount thereof and all other commitments and obligations made or
incurred by Lender with respect thereto. Effective on the issuance of each
Letter of Credit Accommodation, the amount of Revolving Loans which might
otherwise be available to Borrower shall be reduced by the applicable amount
set forth in Section 2.2(c)(i) or Section 2.2(c)(ii).
(d) Except in Lender's discretion, (i) the amount of all
outstanding Letter of Credit Accommodations and all other commitments and
obligations made or incurred by Lender in connection therewith, shall not at
any time exceed $1,000,000, and (ii) the amount of all outstanding Letter of
Credit Accommodations for the purpose of purchasing Eligible Inventory
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and all other commitments and obligations made or incurred by Lender in
connection therewith shall not at any time exceed: (A) $500,000 minus the
amount of the then outstanding Revolving Loans based on Eligible Inventory
consisting of finished goods, pursuant to Section 2.1(a)(ii) hereof, plus (B)
$1,000,000 minus the amount of the then outstanding Revolving Loans based on
Eligible Inventory consisting of raw materials, pursuant to Section
2.1(a)(ii) hereof. At any time an Event of Default exists or has occurred
and is continuing, upon Lender's request, Borrower will either furnish cash
collateral to secure the reimbursement obligations to the issuer in
connection with any Letter of Credit Accommodations or furnish cash
collateral to Lender for the Letter of Credit Accommodations, and in either
case, the Revolving Loans otherwise available to Borrower shall not be
reduced as provided in Section 2.2(c) to the extent of such cash collateral.
(e) Borrower shall indemnify and hold Lender harmless
from and against any and all losses, claims, damages, liabilities, costs and
expenses which Lender may suffer or incur in connection with any Letter of
Credit Accommodations and any documents, drafts or acceptances relating
thereto, including, but not limited to, any losses, claims, damages,
liabilities, costs and expenses due to any action taken by any issuer or
correspondent with respect to any Letter of Credit Accommodation. Borrower
assumes all risks with respect to the acts or omissions of the drawer under
or beneficiary of any Letter of Credit Accommodation and for such purposes
the drawer or beneficiary shall be deemed Borrower's agent. Borrower assumes
all risks for, and agrees to pay, all foreign, Federal, State and local
taxes, duties and levies relating to any goods subject to any Letter of
Credit Accommodations or any documents, drafts or acceptances thereunder.
Borrower hereby releases and holds Lender harmless from and against any acts,
waivers, errors, delays or omissions, whether caused by Borrower, by any
issuer or correspondent or otherwise, unless caused by the gross negligence
or willful misconduct of Lender, with respect to or relating to any Letter of
Credit Accommodation. The provisions of this Section 2.2(e) shall survive
the payment of Obligations and the termination or non-renewal of this
Agreement.
(f) Nothing contained herein shall be deemed or
construed to grant Borrower any right or authority to pledge the credit of
Lender in any manner. Lender shall have no liability of any kind with respect
to any Letter of Credit Accommodation provided by an issuer other than Lender
unless Lender has duly executed and delivered to such issuer the application
or a guarantee or indemnification in writing with respect to such Letter of
Credit Accommodation. Borrower shall be bound by any interpretation made in
good faith by Lender, or any other issuer or correspondent under or in
connection with any Letter of Credit Accommodation or any documents, drafts
or acceptances thereunder, notwithstanding that such interpretation may be
inconsistent with any instructions of Borrower. Lender shall have the sole
and exclusive right and authority to, and Borrower shall not: (i) at any time
an Event of Default exists or has occurred and is continuing, (A) approve or
resolve any questions of non-compliance of documents, (B) give any
instructions as to acceptance or rejection of any documents or goods or (C)
execute any and all applications for steamship or airway guaranties,
indemnities or delivery orders, and (ii) at all times, (A) grant any
extensions of the maturity of, time of payment for, or time of presentation
of, any drafts, acceptances, or documents, and (B) agree to any amendments,
renewals, extensions, modifications, changes or cancellations of any of the
terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances
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thereunder or any letters of credit included in the
Collateral. Lender may take such actions either in its own name or in
Borrower's name.
(g) Any rights, remedies, duties or obligations granted
or undertaken by Borrower to any issuer or correspondent in any application
for any Letter of Credit Accommodation, or any other agreement in favor of
any issuer or correspondent relating to any Letter of Credit Accommodation,
shall be deemed to have been granted or undertaken by Borrower to Lender.
Any duties or obligations undertaken by Lender to any issuer or correspondent
in any application for any Letter of Credit Accommodation, or any other
agreement by Lender in favor of any issuer or correspondent relating to any
Letter of Credit Accommodation, shall be deemed to have been undertaken by
Borrower to Lender and to apply in all respects to Borrower.
2.3 TERM LOAN.
(a) Lender is making Term Loans to Borrower in the
following original principal amounts (which, as provided in Section 1.33, are
collectively referred to in this Agreement as the "Term Loan"):
<TABLE>
<S> <C>
Microtel International, Inc. $729,000
XIT Corporation $379,000
CXR Telcom Corporation $193,000
Hycomp, Inc. $334,000
</TABLE>
The Term Loan is (a) evidenced by Term Promissory Notes in the above original
principal amounts duly executed and delivered by above Borrowers to Lender
concurrently herewith; (b) to be repaid, together with interest and other
amounts, in accordance with this Agreement, the Term Promissory Notes, and
the other Financing Agreements and (c) secured by all of the Collateral.
Borrower represents and warrants that the appraisal of its equipment, on
which the amount of the Term Loan was based, did not include any equipment
which was subject to any liens or security interests in favor of any other
party (other than those being terminated concurrently herewith).
(b) The Term Loan shall be repayable in 60 equal monthly
installments of principal commencing on the first day of the first month
following the date the Term Loan is made and continuing on the same day of
each succeeding month, provided that the entire unpaid principal balance of
the Term Loan shall be due and payable on expiration of the term of this
Agreement or termination of this Agreement by either party as provided
herein.
(c) Borrower may, at its expense, have all (but not less
than all) of its machinery and equipment located in the State of California,
which is free and clear of any and all other liens and security interests
(including Permitted Liens), appraised by Joseph Finn Co. within 30 days
after the date hereof, and in the event such appraisal is acceptable to
Lender in its discretion, the amount of the Term Loan shall be adjusted to an
amount not to exceed the lesser of (i) 100% of the auction value of all of
such equipment net of Lender's estimate as to the costs and expenses of sale
thereof (without duplication), or (ii) 80% of the orderly liquidation value
of
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all such equipment net of Lender's estimate as to the costs and expenses
of sale thereof (without duplication), or (iii) $3,500,000. In the event the
amount of the Term Loan is so adjusted, the regular principal payments
thereunder shall be adjusted so that each regular principal payment is in an
amount equal to the adjusted principal amount thereof divided by the number
of remaining payments.
2.4 CAP EX LOANS.
Subject to, and upon the terms and conditions contained
herein, Lender agrees to make loans (the "Cap Ex Loans") to Borrower from
time to time in amounts requested by Borrower up to 75% of the net purchase
price of new Equipment purchased after the date hereof and acceptable to
Lender in its discretion (provided that not more than $1,000,000 in Cap Ex
Loans shall be made hereunder). Cap Ex Loans may not be re-borrowed after
being repaid. The net purchase price of Equipment means the purchase price
thereof, as shown on the applicable invoice, net of all charges for taxes,
freight, delivery, insurance, installation, set-up, training, manuals, fees,
service charges and other similar items. Cap Ex Loans shall be made in
disbursements of not less than $200,000 each and the proceeds of Cap Ex Loans
shall be used exclusively to purchase the applicable Equipment. Each Cap Ex
Loan shall be repaid by the Borrower to Lender in 60 equal monthly payments
of principal, commencing on the first day of the first month after such Cap
Ex Loan was disbursed and continuing until the earlier of the date such Cap
Ex Loan has been paid in full or the date this Agreement terminates by its
terms or is terminated, at which date the entire unpaid principal balance of
the Cap Ex Loans, plus all accrued and unpaid interest thereon, shall be due
and payable.
SECTION 3. INTEREST AND FEES.
3.1 INTEREST.
(a) Borrower shall pay to Lender interest on the
outstanding principal amount of the non-contingent Obligations as follows:
(1) Borrower shall pay to Lender interest on the
outstanding principal amount of the Revolving Loans at the rate of one
percent (1%) per annum in excess of the Prime Rate; provided that, regardless
of the amount of Revolving Loans outstanding in any month, Borrower shall pay
Lender minimum interest on the Revolving Loans in an amount equal to the
interest which would have been payable thereon at the interest rate in effect
during such month, if the unpaid principal balance of the Revolving Loans was
$2,500,000 throughout such month.
(2) Borrower shall pay to Lender interest on the
outstanding principal amount of the Term Loan and the Cap Ex Loans at the
rate of one and one-quarter percent (1.25%) per annum in excess of the Prime
Rate.
Notwithstanding the foregoing, Borrower shall pay to Lender interest, at
Lender's option, without notice, (i) at the rate of 3% per annum in excess of
the Prime Rate (in the case of the Revolving Loans) and at the rate of 3.25%
per annum in excess of the Prime Rate (in the case of the Term Loan and the
Cap Ex Loans) on the non-contingent Obligations for the period from and after
the date of termination or non-renewal hereof, or the date of the occurrence
of an Event of Default,
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and for so long as such Event of Default is continuing as determined by
Lender and until such time as Lender has received full and final payment of
all such Obligations (notwithstanding entry of any judgment against
Borrower), and (ii) at the rate of 3% per annum in excess of the Prime Rate
on the Revolving Loans at any time outstanding in excess of the amounts
available to Borrower under Section 2 (whether or not such excess(es), arise
or are made with or without Lender's knowledge or consent and whether made
before or after an Event of Default). All interest accruing hereunder on and
after the occurrence of any of the events referred to in Sections 3.1(a)(i)
or 3.1(a)(ii) above shall be payable on demand.
(b) Interest shall be payable by Borrower to Lender
monthly in arrears not later than the first day of each calendar month and
shall be calculated on the basis of a three hundred sixty (360) day year and
actual days elapsed. The interest rate shall increase or decrease by an
amount equal to each increase or decrease in the Prime Rate effective on the
first day of the month after any change in such Prime Rate is announced based
on the Prime Rate in effect on the last day of the month in which any such
change occurs. In no event shall charges constituting interest payable by
Borrower to Lender exceed the maximum amount or the rate permitted under any
applicable law or regulation, and if any part or provision of this Agreement
is in contravention of any such law or regulation, such part or provision
shall be deemed amended to conform thereto.
3.2 CLOSING FEE. Borrower shall pay to Lender as a closing
fee the amount of $105,000, which shall be fully earned as of the date
hereof. Said closing fee shall be payable $75,000 on the date hereof, and
the balance of $30,000 shall be payable on the earlier of (i) the first
anniversary of the date hereof, or (ii) the date this Loan Agreement
terminates by its terms or is terminated by either party as provided herein.
3.3 FACILITY FEE. [Intentionally Omitted.]
3.4 SERVICING FEE. Borrower shall pay to Lender annually a
servicing fee in an amount equal to $36,000 in respect of Lender's services
for each year (or part thereof) while this Agreement remains in effect and
for so long thereafter as any of the Obligations are outstanding, which fee
shall be fully earned in advance as of the date hereof and on each annual
anniversary hereafter, such annual servicing fee to be payable on a
semi-annual basis, in advance, with the first such semi-annual payment, in
the amount of $18,000, payable on the date hereof and successive semi-annual
payments hereafter, each in the amount of $18,000, on the first day of each
six month period hereafter.
3.5 UNUSED LINE FEE. [Intentionally Omitted.]
3.6 COMPENSATION ADJUSTMENT.
(a) If after the date of this Agreement the introduction
of, or any change in, any law or any governmental rule, regulation, policy,
guideline or directive (whether or not having the force of law), or any
interpretation thereof, or compliance by Lender or any Participant therewith:
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<PAGE>
(i) subjects Lender to any tax, duty, charge or
withholding on or from payments due from Borrower (excluding
franchise taxes imposed upon, and taxation of the overall net
income of, Lender or any Participant), or changes the basis of
taxation of payments, in either case in respect of amounts due
it hereunder, or
(ii) imposes or increases or deems applicable any
reserve requirement or other reserve, assessment, insurance
charge, special deposit or similar requirement against assets
of, deposits with or for the account of, or credit extended by
Lender or any Participant, or
(iii) imposes any other condition the result of
which is to increase the cost to Lender or any Participant of
making, funding or maintaining the Revolving Loans or Letter
of Credit Accommodations or reduces any amount receivable by
Lender or any Participant in connection with the Loans or
Letter of Credit Accommodations, or requires Lender or any
Participant to make payment calculated by references to the
amount of loans held or interest received by it, by an amount
deemed material by Lender or any Participant, or
(iv) imposes or increases any capital requirement or
affects the amount of capital required or expected to be
maintained by Lender or any Participant or any corporation
controlling Lender or any Participant, and Lender or any
Participant determines that such imposition or increase in
capital requirements or increase in the amount of capital
expected to be maintained is based upon the existence of this
Agreement or the Loans or Letter of Credit Accommodations
hereunder, all of which may be determined by Lender's
reasonable allocation of the aggregate of its impositions or
increases in capital required or expected to be maintained,
and the result of any of the foregoing is to increase the cost
to Lender or any Participant of making, renewing or
maintaining the Loans or Letter of Credit Accommodations, or
to reduce the rate of return to Lender or any Participant on
the Loans or Letter of Credit Accommodations, then upon demand
by Lender, Borrower shall pay to Lender, and continue to make
periodic payments to Lender or any Participant, such
additional amounts as may be necessary to compensate Lender or
any Participant for any such additional cost incurred or
reduced rate of return realized.
(b) A certificate of Lender claiming entitlement to
compensation as set forth above will be conclusive in the absence of manifest
error. Such certificate will set forth the nature of the occurrence giving
rise to such compensation, the additional amount or amounts to be paid and
the compensation and the method by which such amounts were determined. In
determining any additional amounts due from Borrower under this Section 3.6,
Lender shall act reasonably and in good faith and will, to the extent that
the increased costs, reductions, or amounts received or receivable relate to
the Lender's or a Participant's loans or commitments generally and are not
specifically attributable to the Loans and commitments hereunder, use
averaging and attribution methods which are reasonable and equitable and
which cover all loans and commitments under this Agreement by the Lender or
such Participant, as the case may be, whether or not the loan documentation
for such other loans and commitments permits the Lender or such Participant
to receive compensation costs of the type described in this Section 3.6.
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<PAGE>
SECTION 4. CONDITIONS PRECEDENT.
4.1 CONDITIONS PRECEDENT TO INITIAL LOANS AND LETTER OF
CREDIT ACCOMMODATIONS. Each of the following is a condition precedent to
Lender making the initial Loans and providing the initial Letter of Credit
Accommodations hereunder:
(a) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other documents
as Lender may request to evidence and effectuate the termination of any
interest in and to any assets and properties of Borrower, duly authorized,
executed and delivered by it or each of them, including, but not limited to,
UCC termination statements for all UCC financing statements and Lender shall
have satisfied itself that it has valid, perfected and first priority
security interests in and liens upon the Collateral and any other property
which is intended as security for the Obligations, or the liability of any
Obligor in respect thereto, subject only to the security interests and liens
permitted herein or in the other Financing Agreements;
(b) all requisite corporate action and proceedings in
connection with this Agreement and the other Financing Agreements shall be
satisfactory in form and substance to Lender, and Lender shall have received
all information and copies of all documents, including, without limitation,
records of requisite corporate action and proceedings which Lender may have
requested in connection therewith, such documents where requested by Lender
or its counsel to be certified by appropriate corporate officers or
governmental authorities;
(c) no material adverse change shall have occurred in
the assets, business or prospects of Borrower since the date of Lender's
latest field examination and no change or event shall have occurred which
would impair the ability of Borrower or any Obligor to perform its
obligations hereunder or under any of the other Financing Agreements to which
it is a party or of Lender to enforce the Obligations or realize upon the
Collateral;
(d) Lender shall have completed a field review of the
Records and of such other financial information, projections, budgets,
business plans and cash flows as Lender shall reasonably request from time to
time, including, but not limited to, current agings of receivables, current
perpetual inventory records and/or rollforwards of Accounts and Inventory
through the date of closing (including a physical count of the Inventory by a
third party acceptable to Lender), together with supporting documentation,
including documentation with respect to Inventory in-transit, goods in bonded
warehouses or at other third-party locations, that will enable Lender to
accurately identify and verify the eligible Collateral at or before closing
in a manner satisfactory to Lender, the results of which shall be
satisfactory to Lender;
(e) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgments and other
agreements from third persons which Lender may deem necessary or desirable in
order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement
and the other Financing Agreements, including, without limitation,
acknowledgments by lessors, mortgagees and warehousemen of Lender's security
interests in the Collateral, waivers by such persons of any security
interests, liens or other claims by such persons to the Collateral and
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agreements permitting Lender access to, and the right to remain on, the
premises to exercise its rights and remedies and otherwise deal with the
Collateral;
(f) Lender shall have received evidence of insurance and
loss payee endorsements required hereunder and under the other Financing
Agreements, in form and substance satisfactory to Lender, and certificates of
insurance policies and/or endorsements naming Lender as loss payee;
(g) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrower with
respect to the Financing Agreements and such other matters as Lender may
request, provided that the legal opinion with respect to the due
incorporation, valid existence and good-standing of Hycomp, Inc. shall be
provided by Borrower to Lender within 30 days after the date hereof;
(h) the Excess Availability as determined by Lender as
of the date hereof, shall be satisfactory to Lender, in its discretion, after
giving effect to the initial Loans made or to be made hereunder and the
payment of all fees and expenses payable upon the consummation of the initial
transactions contemplated by this Agreement;
(i) Lender shall have received, in form and substance
satisfactory to Lender and its counsel, the assignment of all of Borrower's
rights in registered patents, trademarks, service marks and copyrights, as
Collateral hereunder, on Lender's standard forms of Collateral Assignments;
(j) Lender shall have received, in form and substance
satisfactory to Lender, an executed copy of a Blocked Account Agreement,
pursuant to Section 6.3(ii) hereof, among Lender, Borrower and such banks as
Lender shall specify; and
(k) the other Financing Agreements and all instruments
and documents hereunder and thereunder shall have been duly executed and
delivered to Lender, in form and substance satisfactory to Lender; and
(l) Imperial Bank shall have terminated its security
interests in all assets of all Borrowers, and any other holders of a security
interest in Borrower's assets including, without limitation, vendors of
Inventory to Borrower, shall have executed intercreditor and subordination
agreements in form and substance satisfactory to Lender; and
(m) Borrower shall have executed and delivered to Lender
a Security Agreement, in such form as Lender shall specify, with respect to
Borrower's partnership interest in Capital Source Partners, a Real Estate
Partnership, a California general partnership, which is the owner of the real
property located at 4290 E. Brickell, Ontario, California, acknowledged and
agreed to by said partnership and the other partner therein.
(n) Borrower shall have received additional cash equity
contributions, concurrently herewith, in an amount not less than $900,000,
and Lender shall have received evidence thereof satisfactory to Lender.
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(o) Lender shall have received cross-corporate
continuing guaranties executed by each Borrower with respect to the
Obligations of the other Borrowers, on such form as it shall specify.
(p) Lender shall have received the original Arnold's
Note, duly endorsed to Lender.
(q) Lender shall have received, reviewed and approved
Borrower's audited December 31, 1997 financial statements.
4.2 CONDITIONS PRECEDENT TO ALL LOANS AND LETTER OF CREDIT
ACCOMMODATIONS. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of Credit Accommodations to
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein
and in the other Financing Agreements shall be true and correct in all
material respects with the same effect as though such representations and
warranties had been made on and as of the date of the making of each such
Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto; and
(b) no Event of Default and no event or condition which,
with notice or passage of time or both, would constitute an Event of Default,
shall exist or have occurred and be continuing on and as of the date of the
making of such Loan or providing each such Letter of Credit Accommodation and
after giving effect thereto.
SECTION 5. GRANT OF SECURITY INTEREST.
To secure payment and performance of all Obligations, Borrower
hereby grants to Lender a continuing security interest in, a lien upon, and a
right of set off against, and hereby assigns to Lender as security, the
following property and interests in property, whether now owned or hereafter
acquired or existing, and wherever located (collectively, the "Collateral"):
5.1 Accounts;
5.2 All present and future contract rights, general
intangibles (including, but not limited to, tax and duty refunds, registered
and unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses
in action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
investment property, letters of credit, bankers' acceptances and guaranties,
(including without limitation the Arnold's Note);
5.3 All present and future monies, securities, credit
balances, deposits, deposit accounts and other property of Borrower now or
hereafter held or received by or in transit to Lender or its affiliates or at
any other depository or other institution from or for the account of
Borrower, whether for safekeeping, pledge, custody, transmission, collection
or otherwise, and
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all present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts and other Collateral, including,
without limitation, (a) rights and remedies under or relating to guaranties,
contracts of suretyship, letters of credit and credit and other insurance
related to the Collateral, (b) rights of stoppage in transit, replevin,
repossession, reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, (c) goods described in invoices, documents,
contracts or instruments with respect to, or otherwise representing or
evidencing, Accounts or other Collateral, including, without limitation,
returned, repossessed and reclaimed goods, and (d) deposits by and property
of account debtors or other persons securing the obligations of account
debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Records; and
5.7 All products and proceeds of the foregoing, in any form,
including, without limitation, insurance proceeds and all claims against
third parties for loss or damage to or destruction of any or all of the
foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 BORROWER'S LOAN ACCOUNT. Lender shall maintain one or
more loan account(s) on its books in which shall be recorded (a) all Loans,
all Letter of Credit Accommodations and other Obligations and the Collateral,
(b) all payments made by or on behalf of Borrower and (c) all other
appropriate debits and credits as provided in this Agreement, including,
without limitation, fees, charges, costs, expenses and interest. All entries
in the loan account(s) shall be made in accordance with Lender's customary
practices as in effect from time to time.
6.2 STATEMENTS. Lender shall render to Borrower each month a
statement setting forth the balance in the Borrower's loan account(s)
maintained by Lender for Borrower pursuant to the provisions of this
Agreement, including principal, interest, fees, costs and expenses. Each
such statement shall be subject to subsequent adjustment by Lender but shall,
absent manifest errors or omissions, be considered correct and deemed
accepted by Borrower and conclusively binding upon Borrower as an account
stated except to the extent that Lender receives a written notice from
Borrower of any specific exceptions of Borrower thereto within thirty (30)
days after the date such statement has been mailed by Lender. Until such time
as Lender shall have rendered to Borrower a written statement as provided
above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.
6.3 COLLECTION OF ACCOUNTS.
(a) Borrower shall establish and maintain, at its
expense, blocked accounts or lockboxes and related blocked accounts (in
either case, "Blocked Accounts"), as Lender may specify, with such banks as
are acceptable to Lender into which Borrower shall promptly deposit and
direct its account debtors to directly remit all payments on Accounts and all
payments constituting proceeds of Inventory or other Collateral in the
identical form in which such
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payments are made, whether by cash, check or other manner. The banks at
which the Blocked Accounts are established shall enter into an agreement, in
form and substance satisfactory to Lender, providing that all items received
or deposited in the Blocked Accounts are the property of Lender, that the
depository bank has no lien upon, or right to setoff against, the Blocked
Accounts, the items received for deposit therein, or the funds from time to
time on deposit therein and that the depository bank will wire, or otherwise
transfer, in immediately available funds, on a daily basis, all funds
received or deposited into the Blocked Accounts to such bank account of
Lender as Lender may from time to time designate for such purpose ("Payment
Account"). Borrower agrees that all payments made to such Blocked Accounts
or other funds received and collected by Lender, whether on the Accounts or
as proceeds of Inventory or other Collateral or otherwise shall be the
property of Lender.
(b) For purposes of calculating interest on the
Obligations, such payments or other funds received will be applied
(conditional upon final collection) to the Obligations one (1) Business Days
following the date of receipt of immediately available funds by Lender in the
Payment Account, or one (1) Business Day following the date of receipt of
funds that are not immediately available to Lender in the Payment Account, as
applicable. For purposes of calculating the amount of the Revolving Loans
available to Borrower such payments will be applied (conditional upon final
collection) to the Obligations on the Business Day of receipt by Lender in
the Payment Account, if such payments are received within sufficient time (in
accordance with Lender's usual and customary practices as in effect from time
to time) to credit Borrower's loan account on such day, and if not, then on
the next Business Day. In the event that there are no outstanding monetary
Obligations at the time such payments or other funds are received, Borrower
shall pay a Lender a charge (the "Float Charge") in an amount equal to
interest at the Reduced Prime Rate on the amount of such payment or other
funds, for one (1) Business Day following the date of receipt of immediately
available funds by Lender in the Payment Account, or two (2) Business Days
following the date of receipt of funds that are not immediately available to
Lender in the Payment Account, as applicable.
(c) Borrower and all of its affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of Lender, any monies, checks, notes, drafts
or any other payment relating to and/or proceeds of Accounts or other
Collateral which come into their possession or under their control and
immediately upon receipt thereof, shall deposit or cause the same to be
deposited in the Blocked Accounts, or remit the same or cause the same to be
remitted, in kind, to Lender. In no event shall the same be commingled with
Borrower's own funds. Borrower agrees to reimburse Lender on demand for any
amounts owed or paid to any bank at which a Blocked Account is established or
any other bank or person involved in the transfer of funds to or from the
Blocked Accounts arising out of Lender's payments to or indemnification of
such bank or person, unless such payment or indemnification obligation of
Lender was a result of Lender's gross negligence or willful misconduct. The
obligation of Borrower to reimburse Lender for such amounts pursuant to this
Section 6.3 shall survive the termination or non-renewal of this Agreement.
6.4 PAYMENTS. All Obligations shall be payable to the
Payment Account as provided in Section 6.3 or such other place as Lender may
designate from time to time. Lender may apply payments received or collected
from Borrower or for the account of Borrower (including, without
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limitation, the monetary proceeds of collections or of realization upon any
Collateral) to such of the Obligations, whether or not then due, in such
order and manner as Lender determines. At Lender's option, all principal,
interest, fees, costs, expenses and other charges provided for in this
Agreement or the other Financing Agreements may be charged directly to the
loan account(s) of Borrower. Borrower shall make all payments to Lender on
the Obligations free and clear of, and without deduction or withholding for
or on account of, any setoff, counterclaim, defense, duties, taxes, levies,
imposts, fees, deductions, withholding, restrictions or conditions of any
kind. If after receipt of any payment of, or proceeds of Collateral applied
to the payment of, any of the Obligations, Lender is required to surrender or
return such payment or proceeds to any Person for any reason, then the
Obligations intended to be satisfied by such payment or proceeds shall be
reinstated and continue and this Agreement shall continue in full force and
effect as if such payment or proceeds had not been received by Lender.
Borrower shall be liable to pay to Lender, and does hereby indemnify and hold
Lender harmless for the amount of any payments or proceeds surrendered or
returned. This Section 6.4 shall remain effective notwithstanding any
contrary action which may be taken by Lender in reliance upon such payment or
proceeds. This Section 6.4 shall survive the payment of the Obligations and
the termination or non-renewal of this Agreement.
6.5 AUTHORIZATION TO MAKE LOANS. Lender is authorized to
make the Loans and provide the Letter of Credit Accommodations based upon
telephonic or other instructions received from anyone purporting to be an
officer of Borrower or other authorized person or, at the discretion of
Lender, if such Loans are necessary to satisfy any Obligations. All requests
for Loans or Letter of Credit Accommodations hereunder shall specify the date
on which the requested advance is to be made or Letter of Credit
Accommodations established (which day shall be a Business Day) and the amount
of the requested Loan. Requests received after 10:30 a.m. (Los Angeles time)
on any day shall be deemed to have been made as of the opening of business on
the immediately following Business Day. All Loans and Letter of Credit
Accommodations under this Agreement shall be conclusively presumed to have
been made to, and at the request of and for the benefit of, Borrower when
deposited to the credit of Borrower or otherwise disbursed or established in
accordance with the instructions of Borrower or in accordance with the terms
and conditions of this Agreement.
6.6 USE OF PROCEEDS. Borrower shall use the initial proceeds
of the Loans provided by Lender to Borrower hereunder only for: (a) payments
to each of the persons listed in the disbursement direction letter furnished
by Borrower to Lender on or about the date hereof and (b) costs, expenses and
fees in connection with the preparation, negotiation, execution and delivery
of this Agreement and the other Financing Agreements. All other Loans made
or Letter of Credit Accommodations provided by Lender to Borrower pursuant to
the provisions hereof shall be used by Borrower only for general operating,
working capital and other proper corporate purposes of Borrower not otherwise
prohibited by the terms hereof. None of the proceeds will be used, directly
or indirectly, for the purpose of purchasing or carrying any margin security
or for the purposes of reducing or retiring any indebtedness which was
originally incurred to purchase or carry any margin security or for any other
purpose which might cause any of the Loans to be considered a "purpose
credit" within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System, as amended.
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SECTION 7. COLLATERAL REPORTING AND COVENANTS.
7.1 COLLATERAL REPORTING. Borrower shall provide Lender with
the following documents in a form satisfactory to Lender: (a) on a regular
basis as required by Lender, a schedule of Accounts; (b) on a monthly basis
or more frequently as Lender may request, (i) perpetual inventory reports,
(ii) inventory reports by category, and reports as to inventory reserves, and
(iii) agings of accounts payable, (c) upon Lender's request, (i) copies of
customer statements and credit memos, remittance advices and reports, and
copies of deposit slips and bank statements, (ii) copies of shipping and
delivery documents, and (iii) copies of purchase orders, invoices and
delivery documents for Inventory and Equipment acquired by Borrower; (d)
agings of accounts receivable on a monthly basis or more frequently as Lender
may request; and (e) such other reports as to the Collateral as Lender shall
request from time to time. If any of Borrower's records or reports of the
Collateral are prepared or maintained by an accounting service, contractor,
shipper or other agent, Borrower hereby irrevocably authorizes such service,
contractor, shipper or agent to deliver such records, reports, and related
documents to Lender and to follow Lender's instructions with respect to
further services at any time that an Event of Default exists or has occurred
and is continuing.
7.2 ACCOUNTS COVENANTS.
(a) Borrower shall notify Lender promptly of: (i) any
material delay in Borrower's performance of any of its obligations to any
account debtor or the assertion of any claims, offsets, defenses or
counterclaims by any account debtor, or any disputes with account debtors, or
any settlement, adjustment or compromise thereof, (ii) all material adverse
information relating to the financial condition of any account debtor and
(iii) any event or circumstance which, to Borrower's knowledge would cause
Lender to consider any then existing Accounts as no longer constituting
Eligible Accounts. No credit, discount, allowance or extension or agreement
for any of the foregoing shall be granted to any account debtor without
Lender's consent, except in the ordinary course of Borrower's business in
accordance with practices and policies previously disclosed in writing to
Lender. So long as no Event of Default exists or has occurred and is
continuing, Borrower shall settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor. At any time that an Event
of Default exists or has occurred and is continuing, Lender shall, at its
option, have the exclusive right to settle, adjust or compromise any claim,
offset, counterclaim or dispute with account debtors or grant any credits,
discounts or allowances.
(b) Borrower shall promptly report to Lender any return
of Inventory by an account debtor having a sales price in excess of $10,000.
At any time that Inventory is returned, reclaimed or repossessed, the related
Account shall not be deemed an Eligible Account. In the event any account
debtor returns Inventory when an Event of Default exists or has occurred and
is continuing, Borrower shall, upon Lender's request, (i) hold the returned
Inventory in trust for Lender, (ii) segregate all returned Inventory from all
of its other property, (iii) dispose of the returned Inventory solely
according to Lender's instructions, and (iv) not issue any credits, discounts
or allowances with respect thereto without Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown
on any invoice delivered to Lender or schedule thereof delivered to Lender
shall be true and complete, (ii) no
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payments shall be made thereon except payments immediately delivered to
Lender pursuant to the terms of this Agreement, (iii) no credit, discount,
allowance or extension or agreement for any of the foregoing shall be granted
to any account debtor except as reported to Lender in accordance with this
Agreement and except for credits, discounts, allowances or extensions made or
given in the ordinary course of Borrower's business in accordance with
practices and policies previously disclosed to Lender, (iv) there shall be no
setoffs, deductions, contras, defenses, counterclaims or disputes existing or
asserted with respect thereto except as reported to Lender in accordance with
the terms of this Agreement, (v) none of the transactions giving rise thereto
will violate any applicable State or Federal laws or regulations, all
documentation relating thereto will be legally sufficient under such laws and
regulations and all such documentation will be legally enforceable in
accordance with its terms.
(d) Lender shall have the right at any time or times, in
Lender's name or in the name of a nominee of Lender, to verify the validity,
amount or any other matter relating to any Account or other Collateral, by
mail, telephone, facsimile transmission or otherwise.
(e) Borrower shall deliver or cause to be delivered to
Lender, with appropriate endorsement and assignment, with full recourse to
Borrower, all chattel paper and instruments which Borrower now owns or may at
any time acquire immediately upon Borrower's receipt thereof, except as
Lender may otherwise agree.
(f) Lender may, at any time or times that an Event of
Default exists or has occurred and is continuing, (i) notify any or all
account debtors that the Accounts have been assigned to Lender and that
Lender has a security interest therein and Lender may direct any or all
accounts debtors to make payment of Accounts directly to Lender, (ii) extend
the time of payment of, compromise, settle or adjust for cash, credit, return
of merchandise or otherwise, and upon any terms or conditions, any and all
Accounts or other obligations included in the Collateral and thereby
discharge or release the account debtor or any other party or parties in any
way liable for payment thereof without affecting any of the Obligations,
(iii) demand, collect or enforce payment of any Accounts or such other
obligations, but without any duty to do so, and Lender shall not be liable
for its failure to collect or enforce the payment thereof nor for the
negligence of its agents or attorneys with respect thereto and (iv) take
whatever other action Lender may deem necessary or desirable for the
protection of its interests. At any time that an Event of Default exists or
has occurred and is continuing, at Lender's request, all invoices and
statements sent to any account debtor shall state that the Accounts and such
other obligations have been assigned to Lender and are payable directly and
only to Lender and Borrower shall deliver to Lender such originals of
documents evidencing the sale and delivery of goods or the performance of
services giving rise to any Accounts as Lender may require.
7.3 INVENTORY COVENANTS. With respect to the Inventory: (a)
Borrower shall at all times maintain inventory records reasonably
satisfactory to Lender, keeping correct and accurate records itemizing and
describing the kind, type, quality and quantity of Inventory, Borrower's cost
therefor and daily withdrawals therefrom and additions thereto; (b) Borrower
shall conduct a physical count of the Inventory at least once each year, but
at any time or times as Lender may request on or after an Event of Default,
and promptly following such physical inventory shall supply Lender with a
report in the form and with such specificity as may be reasonably
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satisfactory to Lender concerning such physical count; (c) Borrower shall not
remove any Inventory from the locations set forth or permitted herein,
without the prior written consent of Lender, except for sales of Inventory in
the ordinary course of Borrower's business and except to move Inventory
directly from one location set forth or permitted herein to another such
location; (d) upon Lender's request, Borrower shall, at its expense, no more
than once in any twelve (12) month period, but at any time or times as Lender
may request on or after an Event of Default, deliver or cause to be delivered
to Lender written reports or appraisals as to the Inventory in form, scope
and methodology acceptable to Lender and by an appraiser acceptable to
Lender, addressed to Lender or upon which Lender is expressly permitted to
rely; (e) Borrower shall produce, use, store and maintain the Inventory, with
all reasonable care and caution and in accordance with applicable standards
of any insurance and in conformity with applicable laws (including, but not
limited to, the requirements of the Federal Fair Labor Standards Act of 1938,
as amended and all rules, regulations and orders related thereto); (f)
Borrower assumes all responsibility and liability arising from or relating to
the production, use, sale or other disposition of the Inventory; (g) Borrower
shall not sell Inventory to any customer on approval, or any other basis
which entitles the customer to return or may obligate Borrower to repurchase
such Inventory; (h) Borrower shall keep the Inventory in good and marketable
condition; and (i) Borrower shall not, without prior written notice to
Lender, acquire or accept any Inventory on consignment or approval.
7.4 EQUIPMENT COVENANTS. With respect to the Equipment: (a)
upon Lender's request, Borrower shall, at its expense, at any time or times
as Lender may request on or after an Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Equipment in
form, scope and methodology acceptable to Lender and by an appraiser
acceptable to Lender; (b) Borrower shall keep the Equipment in good order,
repair, running and marketable condition (ordinary wear and tear excepted);
(c) Borrower shall use the Equipment with all reasonable care and caution and
in accordance with applicable standards of any insurance and in conformity
with all applicable laws; (d) the Equipment is and shall be used in
Borrower's business and not for personal, family, household or farming use;
(e) Borrower shall not remove any Equipment from the locations set forth or
permitted herein, except to the extent necessary to have any Equipment
repaired or maintained in the ordinary course of the business of Borrower or
to move Equipment directly from one location set forth or permitted herein to
another such location and except for the movement of motor vehicles used by
or for the benefit of Borrower in the ordinary course of business; (f) the
Equipment is now and shall remain personal property and Borrower shall not
permit any of the Equipment to be or become a part of or affixed to real
property; and (g) Borrower assumes all responsibility and liability arising
from the use of the Equipment.
7.5 POWER OF ATTORNEY. Borrower hereby irrevocably
designates and appoints Lender (and all persons designated by Lender) as
Borrower's true and lawful attorney-in-fact, and authorizes Lender, in
Borrower's or Lender's name, to: (a) at any time an Event of Default or event
which with notice or passage of time or both would constitute an Event of
Default exists or has occurred and is continuing (i) demand payment on
Accounts or other proceeds of Inventory or other Collateral, (ii) enforce
payment of Accounts by legal proceedings or otherwise, (iii) exercise all of
Borrower's rights and remedies to collect any Account or other Collateral,
(iv) sell or assign any Account upon such terms, for such amount and at such
time or times as the Lender
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deems advisable, (v) settle, adjust, compromise, extend or renew an Account,
(vi) discharge and release any Account, (vii) prepare, file and sign
Borrower's name on any proof of claim in bankruptcy or other similar document
against an account debtor, (viii) notify the post office authorities to
change the address for delivery of Borrower's mail to an address designated
by Lender, and open and dispose of all mail addressed to Borrower, and (ix)
do all acts and things which are necessary, in Lender's determination, to
fulfill Borrower's obligations under this Agreement and the other Financing
Agreements and (b) at any time to (i) take control in any manner of any item
of payment or proceeds thereof, (ii) have access to any lockbox or postal box
into which Borrower's mail is deposited, (iii) endorse Borrower's name upon
any items of payment or proceeds thereof and deposit the same in the Lender's
account for application to the Obligations, (iv) endorse Borrower's name upon
any chattel paper, document, instrument, invoice, or similar document or
agreement relating to any Account or any goods pertaining thereto or any
other Collateral, (v) sign Borrower's name on any verification of Accounts
and notices thereof to account debtors and (vi) execute in Borrower's name
and file any UCC financing statements or amendments thereto. Borrower hereby
releases Lender and its officers, employees and designees from any
liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
Lender's own gross negligence or willful misconduct as determined pursuant to
a final non-appealable order of a court of competent jurisdiction.
7.6 RIGHT TO CURE. Lender may, at its option, (a) cure any
default by Borrower under any agreement with a third party or pay or bond on
appeal any judgment entered against Borrower, (b) discharge taxes, liens,
security interests or other encumbrances at any time levied on or existing
with respect to the Collateral and (c) pay any amount, incur any expense or
perform any act which, in Lender's judgment, is necessary or appropriate to
preserve, protect, insure or maintain the Collateral and the rights of Lender
with respect thereto. Lender may add any amounts so expended to the
Obligations and charge Borrower's account therefor, such amounts to be
repayable by Borrower on demand. Lender shall be under no obligation to
effect such cure, payment or bonding and shall not, by doing so, be deemed to
have assumed any obligation or liability of Borrower. Any payment made or
other action taken by Lender under this Section shall be without prejudice to
any right to assert an Event of Default hereunder and to proceed accordingly.
7.7 ACCESS TO PREMISES. From time to time as requested by
Lender, at the cost and expense of Borrower, (a) Lender or its designee shall
have complete access to all of Borrower's premises during normal business
hours and after notice to Borrower, or at any time and without notice to
Borrower if an Event of Default exists or has occurred and is continuing, for
the purposes of inspecting, verifying and auditing the Collateral and all of
Borrower's books and records, including, without limitation, the Records, and
(b) Borrower shall promptly furnish to Lender such copies of such books and
records or extracts therefrom as Lender may request, and (c) use during
normal business hours such of Borrower's personnel, equipment, supplies and
premises as may be reasonably necessary for the foregoing and if an Event of
Default exists or has occurred and is continuing for the collection of
Accounts and realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES.
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Borrower hereby represents and warrants to Lender the
following (which shall survive the execution and delivery of this Agreement),
the truth and accuracy of which are a continuing condition of the making of
Loans and the providing of Letter of Credit Accommodations by Lender to
Borrower:
8.1 CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES.
Borrower is a corporation duly organized and in good standing under the laws
of its state of incorporation and is duly qualified as a foreign corporation
and in good standing in all states or other jurisdictions where the nature
and extent of the business transacted by it or the ownership of assets makes
such qualification necessary, except for those jurisdictions in which the
failure to so qualify would not have a material adverse effect on Borrower's
financial condition, results of operation or business or the rights of Lender
in or to any of the Collateral. The execution, delivery and performance of
this Agreement, the other Financing Agreements and the transactions
contemplated hereunder and thereunder are all within Borrower's corporate
powers, have been duly authorized and are not in contravention of law or the
terms of Borrower's certificate of incorporation, by-laws, or other
organizational documentation, or any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower or its property are bound.
This Agreement and the other Financing Agreements constitute legal, valid and
binding obligations of Borrower enforceable in accordance with their
respective terms. Borrower does not have any subsidiaries except as set
forth on the Information Certificate.
8.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All
financial statements relating to Borrower which have been or may hereafter be
delivered by Borrower to Lender have been prepared in accordance with GAAP
and fairly present the financial condition and the results of operations of
Borrower as at the dates and for the periods set forth therein. Except as
disclosed in any interim financial statements furnished by Borrower to Lender
prior to the date of this Agreement, there has been no material adverse
change in the assets, liabilities, properties and condition, financial or
otherwise, of Borrower, since the date of the most recent audited financial
statements furnished by Borrower to Lender prior to the date of this
Agreement.
8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief
executive office of Borrower and Borrower's Records concerning Accounts are
located only at the address set forth below and its only other places of
business and the only other locations of Collateral, if any, are the
addresses set forth in the Information Certificate, subject to the right of
Borrower to establish new locations in accordance with Section 9.2 below.
The Information Certificate correctly identifies any of such locations which
are not owned by Borrower and sets forth the owners and/or operators thereof
and to the best of Borrower's knowledge, the holders of any mortgages on such
locations.
8.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security
interests and liens granted to Lender under this Agreement and the other
Financing Agreements constitute valid and perfected first priority liens and
security interests in and upon the Collateral subject only to the liens
permitted under Section 9.8 hereof. Borrower has good and marketable title
to all of its properties and assets subject to no liens, mortgages, pledges,
security interests, encumbrances or charges of any kind, except those granted
to Lender and such others as are permitted under Section 9.8 hereof.
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8.5 TAX RETURNS. Borrower has filed, or caused to be filed,
in a timely manner all tax returns, reports and declarations which are
required to be filed by it (without requests for extension except as
previously disclosed in writing to Lender). All information in such tax
returns, reports and declarations is complete and accurate in all material
respects. Borrower has paid or caused to be paid all taxes due and payable
or claimed due and payable in any assessment received by it, except taxes the
validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower and with respect to
which adequate reserves have been set aside on its books. Adequate provision
has been made for the payment of all accrued and unpaid Federal, State,
county, local, foreign and other taxes whether or not yet due and payable and
whether or not disputed.
8.6 LITIGATION. Except as set forth on the Information
Certificate, there is no present investigation by any governmental agency
pending, or to the best of Borrower's knowledge threatened, against or
affecting Borrower, its assets or business and there is no action, suit,
proceeding or claim by any Person pending, or to the best of Borrower's
knowledge threatened, against Borrower or its assets or goodwill, or against
or affecting any transactions contemplated by this Agreement, which if
adversely determined against Borrower would result in any material adverse
change in the assets, business or prospects of Borrower or would impair the
ability of Borrower to perform its obligations hereunder or under any of the
other Financing Agreements to which it is a party or of Lender to enforce any
Obligations or realize upon any Collateral.
8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS.
Borrower is not in default in any material respect under, or in violation in
any material respect of any of the terms of, any agreement, contract,
instrument, lease or other commitment to which it is a party or by which it
or any of its assets are bound and Borrower is in compliance in all material
respects with all applicable provisions of laws, rules, regulations,
licenses, permits, approvals and orders of any foreign, Federal, State or
local governmental authority.
8.8 ENVIRONMENTAL COMPLIANCE.
(a) Borrower has not generated, used, stored, treated,
transported, manufactured, handled, produced or disposed of any Hazardous
Materials, on or off its premises (whether or not owned by it) in any manner
which at any time violates any applicable Environmental Law or any license,
permit, certificate, approval or similar authorization thereunder and the
operations of Borrower complies in all material respects with all
Environmental Laws and all licenses, permits, certificates, approvals and
similar authorizations thereunder.
(b) There has been no investigation, proceeding,
complaint, order, directive, claim, citation or notice by any governmental
authority or any other person nor is any pending or to the best of Borrower's
knowledge threatened, with respect to any non-compliance with or violation of
the requirements of any Environmental Law by Borrower or the release, spill
or discharge, threatened or actual, of any Hazardous Material or the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials or any other environmental,
health or safety matter, which affects Borrower or its business, operations
or assets or any properties at which Borrower has transported, stored or
disposed of any Hazardous Materials.
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(c) Borrower has no material liability (contingent or
otherwise) in connection with a release, spill or discharge, threatened or
actual, of any Hazardous Materials or the generation, use, storage,
treatment, transportation, manufacture, handling, production or disposal of
any Hazardous Materials.
(d) Borrower has all licenses, permits, certificates,
approvals or similar authorizations required to be obtained or filed in
connection with the operations of Borrower under any Environmental Law and
all of such licenses, permits, certificates, approvals or similar
authorizations are valid and in full force and effect.
8.9 EMPLOYEE BENEFITS.
(a) Borrower has not engaged in any transaction in
connection with which Borrower or any of its ERISA Affiliates could be
subject to either a civil penalty assessed pursuant to Section 502(i) of
ERISA or a tax imposed by Section 4975 of the Code, including any accumulated
funding deficiency described in Section 8.9(c) hereof and any deficiency with
respect to vested accrued benefits described in Section 8.9(d) hereof.
(b) No liability to the Pension Benefit Guaranty
Corporation has been or is expected by Borrower to be incurred with respect
to any employee pension benefit plan of Borrower or any of its ERISA
Affiliates. There has been no reportable event (within the meaning of
Section 4043(b) of ERISA) or any other event or condition with respect to any
employee pension benefit plan of Borrower or any of its ERISA Affiliates
which presents a risk of termination of any such plan by the Pension Benefit
Guaranty Corporation.
(c) Full payment has been made of all amounts which
Borrower or any of its ERISA Affiliates is required under Section 302 of
ERISA and Section 412 of the Code to have paid under the terms of each
employee pension benefit plan as contributions to such plan as of the last
day of the most recent fiscal year of such plan ended prior to the date
hereof, and no accumulated funding deficiency (as defined in Section 302 of
ERISA and Section 412 of the Code), whether or not waived, exists with
respect to any employee pension benefit plan, including any penalty or tax
described in Section 8.9(a) hereof and any deficiency with respect to vested
accrued benefits described in Section 8.9(d) hereof.
(d) The current value of all vested accrued benefits
under all employee pension benefit plans maintained by Borrower that are
subject to Title IV of ERISA does not exceed the current value of the assets
of such plans allocable to such vested accrued benefits, including any
penalty or tax described in Section 8.9(a) hereof and any accumulated funding
deficiency described in Section 8.9(c) hereof. The terms "current value" and
"accrued benefit" have the meanings specified in ERISA.
(e) Neither Borrower nor any of its ERISA Affiliates is
or has ever been obligated to contribute to any "multiemployer plan" (as such
term is defined in Section 4001(a)(3) of ERISA) that is subject to Title IV
of ERISA.
8.10 ACCURACY AND COMPLETENESS OF INFORMATION. All
information furnished by or on behalf of Borrower in writing to Lender in
connection with this Agreement or any of the other
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Financing Agreements or any transaction contemplated hereby or thereby,
including, without limitation, all information on the Information Certificate
is true and correct in all material respects on the date as of which such
information is dated or certified and does not omit any material fact
necessary in order to make such information not misleading. No event or
circumstance has occurred which has had or could reasonably be expected to
have a material adverse affect on the business, assets or prospects of
Borrower, which has not been fully and accurately disclosed to Lender in
writing.
8.11 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations
and warranties contained in this Agreement or any of the other Financing
Agreements shall survive the execution and delivery of this Agreement and
shall be deemed to have been made again to Lender on the date of each
additional borrowing or other credit accommodation hereunder and shall be
conclusively presumed to have been relied on by Lender regardless of any
investigation made or information possessed by Lender. The representations
and warranties set forth herein shall be cumulative and in addition to any
other representations or warranties which Borrower shall now or hereafter
give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS.
9.1 MAINTENANCE OF EXISTENCE. Borrower shall at all times
preserve, renew and keep in full, force and effect its corporate existence
and rights and franchises with respect thereto and maintain in full force and
effect all permits, licenses, trademarks, trade names, approvals,
authorizations, leases and contracts necessary to carry on the business as
presently or proposed to be conducted. Borrower shall give Lender thirty
(30) days prior written notice of any proposed change in its corporate name,
which notice shall set forth the new name and Borrower shall deliver to
Lender a copy of the amendment to the Certificate of Incorporation of
Borrower providing for the name change certified by the Secretary of State of
the jurisdiction of incorporation of Borrower as soon as it is available.
9.2 NEW COLLATERAL LOCATIONS. Borrower may open any new
location within the continental United States provided Borrower (a) gives
Lender thirty (30) days prior written notice of the intended opening of any
such new location and (c) executes and delivers, or causes to be executed and
delivered, to Lender such agreements, documents, and instruments as Lender
may deem reasonably necessary or desirable to protect its interests in the
Collateral at such location, including, without limitation, UCC financing
statements and, if Borrower leases such new location, provides a favorable
landlord waiver or subordination, or, in the alternative, Lender may apply an
Availability Reserve in an amount equal to three (3) months gross rent in a
manner consistent with the Availability Reserve established to cover rent as
defined in Section 1.5 hereof.
9.3 COMPLIANCE WITH LAWS, REGULATIONS.
(a) Borrower shall, at all times, comply in all material
respects with all laws, rules, regulations, licenses, permits, approvals and
orders applicable to it and duly observe all requirements of any Federal,
State or local governmental authority, including, without limitation, the
Employee Retirement Security Act of 1974, as amended, the Occupational Safety
and Hazard Act of 1970, as amended, the Fair Labor Standards Act of 1938, as
amended, and all statutes,
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rules, regulations, orders, permits and stipulations relating to
environmental pollution and employee health and safety, including, without
limitation, all of the Environmental Laws.
(b) Borrower shall establish and maintain, at its
expense, a system to assure and monitor its continued compliance with all
Environmental Laws in all of its operations, which system shall include
annual reviews of such compliance by employees or agents of Borrower who are
familiar with the requirements of the Environmental Laws. Copies of all
environmental surveys, audits, assessments, feasibility studies and results
of remedial investigations shall be promptly furnished, or caused to be
furnished, by Borrower to Lender. Borrower shall take prompt and appropriate
action to respond to any non-compliance with any of the Environmental Laws
and shall regularly report to Lender on such response.
(c) Borrower shall give both oral and written notice to
Lender immediately upon Borrower's receipt of any notice of, or Borrower's
otherwise obtaining knowledge of, (i) the occurrence of any event involving
the release, spill or discharge, threatened or actual, of any Hazardous
Material or (ii) any investigation, proceeding, complaint, order, directive,
claims, citation or notice with respect to: (A) any non-compliance with or
violation of any Environmental Law by Borrower or (B) the release, spill or
discharge, threatened or actual, of any Hazardous Material or (C) the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials or (D) any other
environmental, health or safety matter, which affects Borrower or its
business, operations or assets or any properties at which Borrower
transported, stored or disposed of any Hazardous Materials.
(d) Without limiting the generality of the foregoing,
whenever Lender reasonably determines that there is non-compliance, or any
condition which requires any action by or on behalf of Borrower in order to
avoid any material non-compliance, with any Environmental Law, Borrower
shall, at Lender's request and Borrower's expense: (i) cause an independent
environmental engineer acceptable to Lender to conduct such tests of the site
where Borrower's non-compliance or alleged non-compliance with such
Environmental Laws has occurred as to such non-compliance and prepare and
deliver to Lender a report as to such non-compliance setting forth the
results of such tests, a proposed plan for responding to any environmental
problems described therein, and an estimate of the costs thereof and (ii)
provide to Lender a supplemental report of such engineer whenever the scope
of such non-compliance, or Borrower's response thereto or the estimated costs
thereof, shall change in any material respect.
(e) Borrower shall indemnify and hold harmless Lender,
its directors, officers, employees, agents, invitees, representatives,
successors and assigns, from and against any and all losses, claims, damages,
liabilities, costs, and expenses (including attorneys' fees and legal
expenses) directly or indirectly arising out of or attributable to the use,
generation, manufacture, reproduction, storage, release, threatened release,
spill, discharge, disposal or presence of a Hazardous Material, including,
without limitation, the costs of any required or necessary repair, cleanup or
other remedial work with respect to any property of Borrower and the
preparation and implementation of any closure, remedial or other required
plans. All representations, warranties, covenants and indemnifications in
this Section 9.3 shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
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9.4 PAYMENT OF TAXES AND CLAIMS. Borrower shall duly pay and
discharge all taxes, assessments, contributions and governmental charges upon
or against it or its properties or assets, except for taxes the validity of
which are being contested in good faith by appropriate proceedings diligently
pursued and available to Borrower and with respect to which adequate reserves
have been set aside on its books. Borrower shall be liable for any tax or
penalties imposed on Lender as a result of the financing arrangements
provided for herein and Borrower agrees to indemnify and hold Lender harmless
with respect to the foregoing, and to repay to Lender on demand the amount
thereof, and until paid by Borrower such amount shall be added and deemed
part of the Loans, PROVIDED, THAT, nothing contained herein shall be
construed to require Borrower to pay any income or franchise taxes
attributable to the income of Lender from any amounts charged or paid
hereunder to Lender. The foregoing indemnity shall survive the payment of
the Obligations and the termination or non-renewal of this Agreement.
9.5 INSURANCE. Borrower shall, at all times, maintain with
financially sound and reputable insurers insurance with respect to the
Collateral against loss or damage and all other insurance of the kinds and in
the amounts customarily insured against or carried by corporations of
established reputation engaged in the same or similar businesses and
similarly situated. Said policies of insurance shall be satisfactory to
Lender as to form, amount and insurer. Borrower shall furnish certificates,
policies or endorsements to Lender as Lender shall require as proof of such
insurance, and, if Borrower fails to do so, Lender is authorized, but not
required, to obtain such insurance at the expense of Borrower. All policies
shall provide for at least thirty (30) days prior written notice to Lender of
any cancellation or reduction of coverage and that Lender may act as attorney
for Borrower in obtaining, and at any time an Event of Default exists or has
occurred and is continuing, adjusting, settling, amending and canceling such
insurance. Borrower shall cause Lender to be named as a loss payee and an
additional insured (but without any liability for any premiums) under such
insurance policies and Borrower shall obtain non-contributory lender's loss
payable endorsements to all insurance policies in form and substance
satisfactory to Lender. Such lender's loss payable endorsements shall
specify that the proceeds of such insurance shall be payable to Lender as its
interests may appear and further specify that Lender shall be paid regardless
of any act or omission by Borrower or any of its affiliates. At its option,
Lender may apply any insurance proceeds received by Lender at any time to the
cost of repairs or replacement of Collateral and/or to payment of the
Obligations, whether or not then due, in any order and in such manner as
Lender may determine or hold such proceeds as cash collateral for the
Obligations.
9.6 FINANCIAL STATEMENTS AND OTHER INFORMATION.
(a) Borrower shall keep proper books and records in
which true and complete entries shall be made of all dealings or transactions
of or in relation to the Collateral and the business of Borrower and its
subsidiaries (if any) in accordance with GAAP and Borrower shall furnish or
cause to be furnished to Lender: (i) within thirty (30) days after the end
of each fiscal month (or 45 days after the end of a month which is also the
end of Borrower's fiscal year), monthly unaudited consolidated financial
statements, and, if Borrower has any subsidiaries, unaudited consolidating
financial statements (including in each case balance sheets, statements of
income and loss and statements of shareholders' equity), all in reasonable
detail, fairly presenting the financial position and the results of the
operations of Borrower and its subsidiaries as of the
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end of and through such fiscal month and (ii) within 105 days after the end
of each fiscal year, audited consolidated financial statements and, if
Borrower has any subsidiaries, audited consolidating financial statements of
Borrower and its subsidiaries (including in each case balance sheets,
statements of income and loss, statements of cash flow and statements of
shareholders' equity), and the accompanying notes thereto, all in reasonable
detail, fairly presenting the financial position and the results of the
operations of Borrower and its subsidiaries as of the end of and for such
fiscal year, together with the opinion of independent certified public
accountants, which accountants shall be an independent accounting firm
selected by Borrower and reasonably acceptable to Lender, that such financial
statements have been prepared in accordance with GAAP, and present fairly the
results of operations and financial condition of Borrower and its
subsidiaries as of the end of and for the fiscal year then ended.
(b) Borrower shall promptly notify Lender in writing of
the details of (i) any loss, damage, investigation, action, suit, proceeding
or claim relating to the Collateral or any other property which is security
for the Obligations or which would result in any material adverse change in
Borrower's business, properties, assets, goodwill or condition, financial or
otherwise and (ii) the occurrence of any Event of Default or event which,
with the passage of time or giving of notice or both, would constitute an
Event of Default.
(c) Borrower shall promptly after the sending or filing
thereof furnish or cause to be furnished to Lender copies of all financial
reports which Borrower sends to its stockholders generally and copies of all
reports and registration statements which Borrower files with the Securities
and Exchange Commission, any national securities exchange or the National
Association of Securities Dealers, Inc.
(d) Borrower shall furnish or cause to be furnished to
Lender such budgets, forecasts, projections and other information in respect
of the Collateral and the business of Borrower, as Lender may, from time to
time, reasonably request. Lender is hereby authorized to deliver a copy of
any financial statement or any other information relating to the business of
Borrower to any court or other government agency or to any participant or
assignee or prospective participant or assignee. Borrower hereby irrevocably
authorizes and directs all accountants or auditors to deliver to Lender, at
Borrower's expense, copies of the financial statements of Borrower and any
reports or management letters prepared by such accountants or auditors on
behalf of Borrower and to disclose to Lender such information as they may
have regarding the business of Borrower. Any documents, schedules, invoices
or other papers delivered to Lender may be destroyed or otherwise disposed of
by Lender one (1) year after the same are delivered to Lender, except as
otherwise designated by Borrower to Lender in writing.
9.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC.
Borrower shall not, directly or indirectly, (a) merge into or with or
consolidate with any other Person or permit any other Person to merge into or
with or consolidate with it, or (b) sell, assign, lease, transfer, abandon or
otherwise dispose of any stock or indebtedness to any other Person or any of
its assets to any other Person (except for (i) sales of Inventory in the
ordinary course of business and (ii) the disposition of worn-out or obsolete
Equipment or Equipment no longer used in the business of Borrower so long as
(A) if an Event of Default exists or has occurred and is continuing, any
proceeds are paid to Lender and (B) such sales do not involve Equipment
having an aggregate
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fair market value in excess of $25,000 for all such Equipment disposed of in
any fiscal year of Borrower), or (c) form or acquire any subsidiaries, or (d)
wind up, liquidate or dissolve or (e) agree to do any of the foregoing.
9.8 ENCUMBRANCES. Borrower shall not create, incur, assume
or suffer to exist any security interest, mortgage, pledge, lien, charge or
other encumbrance of any nature whatsoever on any of its assets or
properties, including, without limitation, the Collateral, EXCEPT: (a) liens
and security interests of Lender; (b) liens securing the payment of taxes,
either not yet overdue or the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books;
(c) non-consensual statutory liens (other than liens securing the payment of
taxes) arising in the ordinary course of Borrower's business to the extent:
(i) such liens secure indebtedness which is not overdue or (ii) such liens
secure indebtedness relating to claims or liabilities which are fully insured
and being defended at the sole cost and expense and at the sole risk of the
insurer or being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower, in each case prior to the
commencement of foreclosure or other similar proceedings and with respect to
which adequate reserves have been set aside on its books; (d) zoning
restrictions, easements, licenses, covenants and other restrictions affecting
the use of real property which do not interfere in any material respect with
the use of such real property or ordinary conduct of the business of Borrower
as presently conducted thereon or materially impair the value of the real
property which may be subject thereto; and (e) purchase money security
interests in Equipment (including capital leases) and purchase money
mortgages on real estate not to exceed $100,000 in the aggregate at any time
outstanding so long as such security interests and mortgages do not apply to
any property of Borrower other than the Equipment or real estate so acquired,
and the indebtedness secured thereby does not exceed the cost of the
Equipment or real estate so acquired, as the case may be.
9.9 INDEBTEDNESS. Borrower shall not incur, create, assume,
become or be liable in any manner with respect to, or permit to exist, any
obligations or indebtedness, EXCEPT (a) the Obligations; (b) trade
obligations and normal accruals in the ordinary course of business not yet
due and payable, or with respect to which the Borrower is contesting in good
faith the amount or validity thereof by appropriate proceedings diligently
pursued and available to Borrower, and with respect to which adequate
reserves have been set aside on its books; (c) purchase money indebtedness
(including capital leases) to the extent not incurred or secured by liens
(including capital leases) in violation of any other provision of this
Agreement; and (d) obligations or indebtedness set forth on the Information
Certificate; PROVIDED, THAT, (i) Borrower may only make regularly scheduled
payments of principal and interest in respect of such indebtedness in
accordance with the terms of the agreement or instrument evidencing or giving
rise to such indebtedness as in effect on the date hereof, (ii) Borrower
shall not, directly or indirectly, (A) amend, modify, alter or change the
terms of such indebtedness or any agreement, document or instrument related
thereto as in effect on the date hereof, or (B) except as otherwise permitted
under this Agreement, redeem, retire, defease, purchase or otherwise acquire
such indebtedness, or set aside or otherwise deposit or invest any sums for
such purpose, and (iii) Borrower shall furnish to Lender all notices or
demands in connection with such indebtedness either received by Borrower or
on its behalf, promptly after the receipt thereof, or sent by Borrower or on
its behalf, concurrently with the sending thereof, as the case may be.
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9.10 LOANS, INVESTMENTS, GUARANTEES, ETC. Borrower shall not,
directly or indirectly, make any loans or advance money or property to any
person, or invest in (by capital contribution, dividend or otherwise) or
purchase or repurchase the stock or indebtedness or all or a substantial part
of the assets or property of any person, or guarantee, assume, endorse, or
otherwise become responsible for (directly or indirectly) the indebtedness,
performance, obligations or dividends of any Person or agree to do any of the
foregoing, EXCEPT: (a) the endorsement of instruments for collection or
deposit in the ordinary course of business; (b) investments in: (i)
short-term direct obligations of the United States Government, (ii)
negotiable certificates of deposit issued by any bank satisfactory to Lender,
payable to the order of the Borrower or to bearer and delivered to Lender,
and (iii) commercial paper rated A1 or P1; PROVIDED, THAT, as to any of the
foregoing, unless waived in writing by Lender, Borrower shall take such
actions as are deemed necessary by Lender to perfect the security interest of
Lender in such investments, (c) the guarantees set forth in the Information
Certificate, (d) loans in the ordinary course of business from one Borrower
to another Borrower, and (e) guarantees by a Borrower of a foreign subsidiary
of such Borrower in an aggregate amount outstanding at any one time for all
Borrowers not to exceed $250,000.
9.11 DIVIDENDS AND REDEMPTIONS. Borrower shall not, directly
or indirectly, declare or pay any dividends on account of any shares of any
class of capital stock of Borrower now or hereafter outstanding, or set aside
or otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital
stock (or set aside or otherwise deposit or invest any sums for such purpose)
for any consideration other than common stock or apply or set apart any sum,
or make any other distribution (by reduction of capital or otherwise) in
respect of any such shares or agree to do any of the foregoing.
9.12 TRANSACTIONS WITH AFFILIATES. Borrower shall not enter
into any transaction for the purchase, sale or exchange of property or the
rendering of any service to or by any affiliate, except in the ordinary
course of and pursuant to the reasonable requirements of Borrower's business
and upon fair and reasonable terms no less favorable to the Borrower than
Borrower would obtain in a comparable arm's length transaction with an
unaffiliated person; provided that Borrower may sell Inventory in the
ordinary course of business to its foreign subsidiaries at not less than 80%
of Borrower's regular seller price for such Inventory, provided that the
total of such sales to foreign subsidiaries shall be not more than $2,500,000
in the aggregate for all Borrowers in any fiscal year and such sales shall be
at a positive gross profit margin.
9.13 [Intentionally Omitted.]
9.14 ADJUSTED NET WORTH. Borrower shall, at all times,
maintain Adjusted Net Worth of not less than $_____________.
9.15 COMPLIANCE WITH ERISA. Borrower shall not with respect
to any "employee pension benefit plan" maintained by Borrower or any of its
ERISA Affiliates:
(a) (i) terminate any of such employee pension benefit
plans so as to incur any liability to the Pension Benefit Guaranty
Corporation established pursuant to ERISA, (ii) allow or suffer to exist any
prohibited transaction involving any of such employee pension benefit plans
or any trust created thereunder which would subject Borrower or such ERISA
Affiliate to a tax or penalty or other liability on prohibited transactions
imposed under Section
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4975 of the Code or ERISA, (iii) fail to pay to any such employee pension
benefit plan any contribution which it is obligated to pay under Section 302
of ERISA, Section 412 of the Code or the terms of such plan, (iv) allow or
suffer to exist any accumulated funding deficiency, whether or not waived,
with respect to any such employee pension benefit plan, (v) allow or suffer
to exist any occurrence of a reportable event or any other event or condition
which presents a material risk of termination by the Pension Benefit Guaranty
Corporation of any such employee pension benefit plan that is a single
employer plan, which termination could result in any liability to the Pension
Benefit Guaranty Corporation or (vi) incur any withdrawal liability with
respect to any multiemployer pension plan.
(b) As used in this Section 9.15, the term "employee
pension benefit plans," "employee benefit plans", "accumulated funding
deficiency" and "reportable event" shall have the respective meanings
assigned to them in ERISA, and the term "prohibited transaction" shall have
the meaning assigned to it in Section 4975 of the Code and ERISA.
9.16 COSTS AND EXPENSES. Borrower shall pay to Lender on
demand all costs, expenses, filing fees and taxes paid or payable in
connection with the preparation, negotiation, execution, delivery, recording,
administration, collection, liquidation, enforcement and defense of the
Obligations, Lender's rights in the Collateral, this Agreement, the other
Financing Agreements and all other documents related hereto or thereto,
including any amendments, supplements or consents which may hereafter be
contemplated (whether or not executed) or entered into in respect hereof and
thereof, including, but not limited to: (a) all costs and expenses of filing
or recording (including Uniform Commercial Code financing statement filing
taxes and fees, documentary taxes, intangibles taxes and mortgage recording
taxes and fees, if applicable); (b) costs and expenses and fees for title
insurance and other insurance premiums, environmental audits, surveys,
assessments, engineering reports and inspections, appraisal fees and search
fees; (c) costs and expenses of remitting loan proceeds, collecting checks
and other items of payment, and establishing and maintaining the Blocked
Accounts, together with Lender's customary charges and fees with respect
thereto; (d) charges, fees or expenses charged by any bank or issuer in
connection with the Letter of Credit Accommodations; (e) costs and expenses
of preserving and protecting the Collateral; (f) costs and expenses paid or
incurred in connection with obtaining payment of the Obligations, enforcing
the security interests and liens of Lender, selling or otherwise realizing
upon the Collateral, and otherwise enforcing the provisions of this Agreement
and the other Financing Agreements or defending any claims made or threatened
against Lender arising out of the transactions contemplated hereby and
thereby (including, without limitation, preparations for and consultations
concerning any such matters); (g) all out-of-pocket expenses and costs
heretofore and from time to time hereafter incurred by Lender during the
course of periodic field examinations of the Collateral and Borrower's
operations, plus a per diem charge at the rate of $650 per person per day for
Lender's examiners in the field and office; and (h) the fees and
disbursements of counsel (including legal assistants) to Lender in connection
with any of the foregoing.
9.17 FURTHER ASSURANCES. At the request of Lender at any time
and from time to time, Borrower shall, at its expense, duly execute and
deliver, or cause to be duly executed and delivered, such further agreements,
documents and instruments, and do or cause to be done such further acts as
may be necessary or proper to evidence, perfect, maintain and enforce the
security
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interests and the priority thereof in the Collateral and to otherwise
effectuate the provisions or purposes of this Agreement or any of the other
Financing Agreements. Lender may at any time and from time to time request a
certificate from an officer of Borrower representing that all conditions
precedent to the making of Loans and providing Letter of Credit
Accommodations contained herein are satisfied. In the event of such request
by Lender, Lender may, at its option, cease to make any further Loans or
provide any further Letter of Credit Accommodations until Lender has received
such certificate and, in addition, Lender has determined that such conditions
are satisfied. Where permitted by law, Borrower hereby authorizes Lender to
execute and file one or more UCC financing statements signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. The occurrence or existence of any
one or more of the following events are referred to herein individually as an
"EVENT OF DEFAULT", and collectively as "EVENTS OF DEFAULT":
(a) Borrower fails to pay when due any of the
Obligations or fails to perform any of the terms, covenants, conditions or
provisions contained in this Agreement or any of the other Financing
Agreements;
(b) Any representation, warranty or statement of fact
made by Borrower to Lender in this Agreement, the other Financing Agreements
or any other agreement, schedule, confirmatory assignment or otherwise shall
when made or deemed made be false or misleading in any material respect;
(c) Any Obligor revokes, terminates or fails to perform
any of the terms, covenants, conditions or provisions of any guarantee,
endorsement or other agreement of such party in favor of Lender;
(d) Any judgment for the payment of money is rendered
against Borrower or any Obligor in excess of $25,000 in any one case or in
excess of $50,000 in the aggregate and shall remain undischarged or unvacated
for a period in excess of thirty (30) days or execution shall at any time not
be effectively stayed, or any judgment other than for the payment of money,
or injunction, attachment, garnishment or execution is rendered against
Borrower or any Obligor or any of their assets;
(e) Any Obligor (being a natural person or a general
partner of an Obligor which is a partnership) dies or Borrower or any
Obligor, which is a partnership, limited liability company or corporation,
dissolves or suspends or discontinues doing business;
(f) Borrower or any Obligor becomes insolvent (however
defined or evidenced), makes an assignment for the benefit of creditors,
makes or sends notice of a bulk transfer or calls a meeting of its creditors
or principal creditors;
(g) A case or proceeding under the bankruptcy laws of
the United States of America now or hereafter in effect or under any
insolvency, reorganization, receivership, readjustment of debt, dissolution
or liquidation law or statute of any jurisdiction now or hereafter
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in effect (whether at law or in equity) is filed against Borrower or any
Obligor or all or any part of its properties and such petition or application
is not dismissed within thirty (30) days after the date of its filing or
Borrower or any Obligor shall file any answer admitting or not contesting
such petition or application or indicates its consent to, acquiescence in or
approval of, any such action or proceeding or the relief requested is granted
sooner;
(h) A case or proceeding under the bankruptcy laws of
the United States of America now or hereafter in effect or under any
insolvency, reorganization, receivership, readjustment of debt, dissolution
or liquidation law or statute of any jurisdiction now or hereafter in effect
(whether at a law or equity) is filed by Borrower or any Obligor or for all
or any part of its property; or
(i) Any default by Borrower or any Obligor under any
agreement, document or instrument relating to any indebtedness for borrowed
money owing to any person other than Lender, or any capitalized lease
obligations, contingent indebtedness in connection with any guarantee, letter
of credit, indemnity or similar type of instrument in favor of any person
other than Lender, in any case in an amount in excess of $25,000, which
default continues for more than the applicable cure period, if any, with
respect thereto, or any default by Borrower or any Obligor under any material
contract, lease, license or other obligation to any person other than Lender,
which default continues for more than the applicable cure period, if any,
with respect thereto;
(j) any change in the controlling ownership of Borrower;
(k) the indictment or threatened indictment of Borrower
or any Obligor under any criminal statute, or commencement or threatened
commencement of criminal or civil proceedings against Borrower or any
Obligor, pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of any of the property of Borrower or
such Obligor;
(l) there shall be a material adverse change in the
business, assets or prospects of Borrower or any Obligor after the date
hereof; or
(m) there shall be an event of default under any of the
other Financing Agreements.
10.2 REMEDIES.
(a) at any time an Event of Default exists or has
occurred and is continuing, Lender shall have all rights and remedies
provided in this Agreement, the other Financing Agreements, the Uniform
Commercial Code and other applicable law, all of which rights and remedies
may be exercised without notice to or consent by Borrower or any Obligor,
except as such notice or consent is expressly provided for hereunder or
required by applicable law. All rights, remedies and powers granted to
Lender hereunder, under any of the other Financing Agreements, the Uniform
Commercial Code or other applicable law, are cumulative, not exclusive and
enforceable, in Lender's discretion, alternatively, successively, or
concurrently on any one or more occasions, and shall include, without
limitation, the right to apply to a court of
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equity for an injunction to restrain a breach or threatened breach by
Borrower of this Agreement or any of the other Financing Agreements. Lender
may, at any time or times, proceed directly against Borrower or any Obligor
to collect the Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its
discretion and without limitation, (i) accelerate the payment of all
Obligations and demand immediate payment thereof to Lender (PROVIDED, THAT,
upon the occurrence of any Event of Default described in Sections 10.1(g) and
10.1(h), all Obligations shall automatically become immediately due and
payable), (ii) with or without judicial process or the aid or assistance of
others, enter upon any premises on or in which any of the Collateral may be
located and take possession of the Collateral or complete processing,
manufacturing and repair of all or any portion of the Collateral, (iii)
require Borrower, at Borrower's expense, to assemble and make available to
Lender any part or all of the Collateral at any place and time designated by
Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize
upon any and all Collateral, (v) remove any or all of the Collateral from any
premises on or in which the same may be located for the purpose of effecting
the sale, foreclosure or other disposition thereof or for any other purpose,
(vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and
all Collateral (including, without limitation, entering into contracts with
respect thereto, public or private sales at any exchange, broker's board, at
any office of Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the Lender
having the right to purchase the whole or any part of the Collateral at any
such public sale, all of the foregoing being free from any right or equity of
redemption of Borrower, which right or equity of redemption is hereby
expressly waived and released by Borrower and/or (vii) terminate this
Agreement. If any of the Collateral is sold or leased by Lender upon credit
terms or for future delivery, the Obligations shall not be reduced as a
result thereof until payment therefor is finally collected by Lender. If
notice of disposition of Collateral is required by law, five (5) days prior
notice by Lender to Borrower designating the time and place of any public
sale or the time after which any private sale or other intended disposition
of Collateral is to be made, shall be deemed to be reasonable notice thereof
and Borrower waives any other notice. In the event Lender institutes an
action to recover any Collateral or seeks recovery of any Collateral by way
of prejudgment remedy, Borrower waives the posting of any bond which might
otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of
the Collateral to payment of the Obligations, in whole or in part and in such
order as Lender may elect, whether or not then due. Borrower shall remain
liable to Lender for the payment of any deficiency with interest at the
highest rate provided for herein and all costs and expenses of collection or
enforcement, including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both
would constitute an Event of Default, Lender may, at its option, without
notice, (i) cease making Loans or arranging for Letter of Credit
Accommodations or reduce the lending formulas or amounts of Revolving Loans
and Letter of Credit Accommodations available to Borrower and/or (ii)
terminate any provision of
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this Agreement providing for any future Loans or Letter of Credit
Accommodations to be made by Lender to Borrower.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERSAND CONSENTS; GOVERNING LAW.
11.1 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL
WAIVER.
(a) The validity, interpretation and enforcement of this Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of California
(without giving effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the state courts of the County of Los Angeles,
State of California and of the United States District Court for the Central
District of California and waive any objection based on venue or FORUM NON
CONVENIENS with respect to any action instituted therein arising under this
Agreement or any of the other Financing Agreements or in any way connected
with or related or incidental to the dealings of the parties hereto in
respect of this Agreement or any of the other Financing Agreements or the
transactions related hereto or thereto, in each case whether now existing or
hereafter arising, and whether in contract, tort, equity or otherwise, and
agree that any dispute with respect to any such matters shall be heard only
in the courts described above (except that Lender shall have the right to
bring any action or proceeding against Borrower or its property in the courts
of any other jurisdiction which Lender deems necessary or appropriate in
order to realize on the Collateral or to otherwise enforce its rights against
Borrower or its property).
(c) Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth
on the signature pages hereof and service so made shall be deemed to be
completed five (5) days after the same shall have been so deposited in the
U.S. mails, or, at Lender's option, by service upon Borrower in any other
manner provided under the rules of any such courts. Within thirty (30) days
after such service, Borrower shall appear in answer to such process, failing
which Borrower shall be deemed in default and judgment may be entered by
Lender against Borrower for the amount of the claim and other relief
requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO
IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE.
BORROWER AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A
JURY AND THAT BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY
OF THIS
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<PAGE>
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses
were the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit
of the rebuttable presumption that it acted in good faith and with the
exercise of ordinary care in the performance by it of the terms of this
Agreement.
11.2 WAIVER OF NOTICES. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with
respect to any and all instruments and commercial paper, included in or
evidencing any of the Obligations or the Collateral, and any and all other
demands and notices of any kind or nature whatsoever with respect to the
Obligations, the Collateral and this Agreement, except such as are expressly
provided for herein. No notice to or demand on Borrower which Lender may
elect to give shall entitle Borrower to any other or further notice or demand
in the same, similar or other circumstances.
11.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course
of conduct, but only by a written agreement signed by an authorized officer
of Lender. Lender shall not, by any act, delay, omission or otherwise be
deemed to have expressly or impliedly waived any of its rights, powers and/or
remedies unless such waiver shall be in writing and signed by an authorized
officer of Lender. Any such waiver shall be enforceable only to the extent
specifically set forth therein. A waiver by Lender of any right, power
and/or remedy on any one occasion shall not be construed as a bar to or
waiver of any such right, power and/or remedy which Lender would otherwise
have on any future occasion, whether similar in kind or otherwise.
11.4 WAIVER OF COUNTERCLAIMS. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other than
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 INDEMNIFICATION. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and
all losses, claims, damages, liabilities, costs or expenses imposed on,
incurred by or asserted against any of them in connection with any
litigation, investigation, claim or proceeding commenced or threatened
related to the negotiation, preparation, execution, delivery, enforcement,
performance or administration of this Agreement, any other Financing
Agreements, or any undertaking or proceeding related to any of the
transactions contemplated hereby or any act, omission, event or transaction
related or attendant thereto, including, without limitation, amounts paid in
settlement, court costs, and the fees and expenses of counsel. To the extent
that the undertaking to indemnify, pay and hold harmless set forth in this
Section may be unenforceable because it violates any law or public policy,
Borrower shall pay the maximum portion which it is permitted to pay under
applicable law to Lender in satisfaction of indemnified matters under this
Section.
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The foregoing indemnity shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS.
12.1 TERM.
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the date two (2) years
from the date hereof (the "Renewal Date"), and from year to year thereafter,
unless sooner terminated pursuant to the terms hereof. Lender or Borrower
may terminate this Agreement and the other Financing Agreements effective on
the Renewal Date or on the anniversary of the Renewal Date in any year by
giving to the other party at least sixty (60) days prior written notice.
Borrower may terminate this Agreement prior to the end of the then current
term, including any renewal term, for any reason upon sixty (60) days prior
written notice to Lender, and in such case Borrower agrees to pay to Lender
the applicable early termination fee provided for in Section 12.1(c) hereof.
Regardless of the timing of termination, this Agreement and all other
Financing Agreements must be terminated simultaneously. Upon the effective
date of termination or non-renewal of the Financing Agreements, Borrower
shall pay to Lender, in full, all outstanding and unpaid Obligations and
shall furnish cash collateral to Lender in such amounts as Lender determines
are reasonably necessary to secure Lender from loss, cost, damage or expense,
including attorneys' fees and legal expenses, in connection with any
contingent Obligations, including issued and outstanding Letter of Credit
Accommodations and checks or other payments provisionally credited to the
Obligations and/or as to which Lender has not yet received final and
indefeasible payment. Such cash collateral shall be remitted by wire
transfer in Federal funds to such bank account of Lender, as Lender may, in
its discretion, designate in writing to Borrower for such purpose. Interest
shall be due until and including the next Business Day, if the amounts so
paid by Borrower to the bank account designated by Lender are received in
such bank account later than 10:30 a.m., Los Angeles time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing
Agreements until all Obligations have been fully and finally discharged and
paid, and Lender's continuing security interest in the Collateral and the
rights and remedies of Lender hereunder, under the other Financing Agreements
and applicable law, shall remain in effect until all such Obligations have
been fully and finally discharged and paid.
(c) If for any reason this Agreement is terminated prior to the
end of the then current term or renewal term of this Agreement, Borrower
agrees to pay to Lender, upon the effective date of such termination, an
early termination fee in the amount set forth below if such termination is
effective in the period indicated:
AMOUNT PERIOD
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(i) 3% of the Maximum Credit from the date of this Agreement to and
including the day preceding the first
anniversary of this Agreement
(ii) 2% of the Maximum Credit from the first anniversary of this
Agreement to and including the Renewal
Date, and if the Renewal Date is
extended as provided in Section 12.1(a),
at any time during a renewal term, if
any.
The early termination fee provided for in this Section 12.1 shall be deemed
included in the Obligations.
12.2 NOTICES. All notices, requests and demands hereunder shall be
in writing and (a) made to Lender at its address set forth below and to
Borrower at its chief executive office set forth below, or to such other
address as either party may designate by written notice to the other in
accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with
instructions to deliver the next Business Day, one (1) Business Day after
sending; and if by certified mail, return receipt requested, five (5) days
after mailing.
12.3 PARTIAL INVALIDITY. If any provision of this Agreement is
held to be invalid or unenforceable, such invalidity or unenforceability
shall not invalidate this Agreement as a whole, but this Agreement shall be
construed as though it did not contain the particular provision held to be
invalid or unenforceable and the rights and obligations of the parties shall
be construed and enforced only to such extent as shall be permitted by
applicable law.
12.4 SUCCESSORS. This Agreement, the other Financing Agreements
and any other document referred to herein or therein shall be binding upon
and inure to the benefit of and be enforceable by Lender, Borrower and their
respective successors and assigns, except that Borrower may not assign its
rights under this Agreement, the other Financing Agreements and any other
document referred to herein or therein without the prior written consent of
Lender. Lender may, after notice to Borrower, assign its rights and delegate
its obligations under this Agreement and the other Financing Agreements and
further may assign, or sell participations in, all or any part of the Loans,
the Letter of Credit Accommodations or any other interest herein to another
financial institution or other person, in which event, the assignee or
participant shall have, to the extent of such assignment or participation,
the same rights and benefits as it would have if it were the Lender
hereunder, except as otherwise provided by the terms of such assignment or
participation.
12.5 ENTIRE AGREEMENT. This Agreement, the other Financing
Agreements, any supplements hereto or thereto, and any instruments or
documents delivered or to be delivered in connection herewith or therewith
represents the entire agreement and understanding concerning the subject
matter hereof and thereof between the parties hereto, and supersede all other
prior agreements, understandings, negotiations and discussions,
representations, warranties,
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commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written.
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be
duly executed as of the day and year first above written.
Lender: Borrower:
CONGRESS FINANCIAL CORPORATION MICROTEL INTERNATIONAL, INC.
(WESTERN)
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
Address: Chief Executive Office:
---------------------------------
225 South Lake Avenue ---------------------------------
Suite 1000
Pasadena, California 91101
Borrower: Borrower:
XIT CORPORATION CXR TELCOM CORPORATION
By: By:
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
Chief Executive Office: Chief Executive Office:
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
Borrower:
HYCOMP, INC.
By:
------------------------------
Title:
---------------------------
Chief Executive Office:
- ---------------------------------
- ---------------------------------
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<PAGE>
SECURITY AGREEMENT
(PARTNERSHIP INTEREST)
THIS SECURITY AGREEMENT is entered into on June 23, 1998 between Congress
Financial Corporation (Western) ("Secured Party") and XIT Corporation
("Pledgor") in connection with that certain Loan and Security Agreement of even
date between Secured Party as lender and Pledgor, Microtel International, Inc.,
CXR Telcom Corporation and Hycomp, Inc., as borrowers (the "Loan Agreement").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. SECURITY INTEREST.
1.1 GRANT OF SECURITY INTEREST. Pledgor hereby pledges to Secured
Party and grants Secured Party a security interest in all of the following,
whether now owned or hereafter acquired (collectively, the "Collateral"):
(a) All of Pledgor's present and future interest in Capital Source
Partners, a Real Estate Partnership, a California general partnership (the
"Partnership"), including without limitation Pledgor's existing partnership
interest in the Partnership and all of Pledgor's present and future interest in
the capital, profits, income and distributions of the Partnership (collectively,
the "Partnership Interest"); and
(b) All rights to, and in connection with, the Security Loan (as
defined in Section 5.1(c) of the Partnership Agreement) (the "Security Loan");
and
(c) All payments on and with respect to, and all proceeds of, the
Partnership Interest and the Security Loan, including without limitation all
money, accounts, deposit accounts, chattel paper, documents, notes, drafts,
instruments, contract rights, general intangibles, equipment, inventory, goods,
insurance proceeds and all other tangible and intangible property resulting from
the sale, collection upon, distribution or payment on account of, or other
disposition of, the Partnership Interest or the Security Loan (collectively,
"Partnership Proceeds"); and
(d) All present and future books, records, data and other
documentation, relating to the Partnership or the Partnership Interest,
including without limitation all reports and financial statements;
TO SECURE the payment and performance of all debts, duties, obligations,
liabilities, representations, warranties and guaranties of Pledgor to Secured
Party, heretofore, now, or hereafter made, incurred or created, of every kind
and nature (collectively, the "Obligations"), including, but not limited to,
those arising under the Loan Agreement or any other documents relating thereto.
(The foregoing documents and agreements, the Loan Agreement, this Agreement, and
all other present and future instruments and agreements between Pledgor and
Secured Party are referred to in this Agreement as the "Loan Documents.")
1.2 DISTRIBUTIONS. From and after the date of this Agreement,
Pledgor shall remit to Secured Party all Partnership Proceeds received by
Pledgor, to be applied to the Revolving Loans (as defined in the Loan
Agreement), whether or not any Event of Default has
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<PAGE>
occurred. (As used in this Agreement, "Obligor" shall mean the Partnership
and all other persons who now are or hereafter become in any way obligated,
liable or responsible for any payment or other distribution of any kind on
account of the Partnership Interest, or for any other payment of Partnership
Proceeds.) All Partnership Proceeds actually received by Secured Party in
cash shall be applied to the Revolving Loans. Pledgor shall not commingle
such Partnership Proceeds with any of Pledgor's other funds or property; and
shall hold such Partnership Proceeds separate and apart from Pledgor's other
funds and property in an express trust for Secured Party until paid or
delivered to Secured Party.
1.3 NOTICE TO OBLIGORS OF SECURITY INTEREST. Concurrently with
Pledgor's execution of this Agreement, Pledgor shall (a) send a notice to the
Partnership stating that Pledgor has granted a security interest in the
Collateral to Secured Party; (b) cause the Partnership to provide Secured Party
with a written agreement, satisfactory to Secured Party in form and substance,
in which the Partnership agrees to (i) pay or deliver all Partnership Proceeds
directly to Secured Party from and after the date written notice of an Event of
Default is given to the Partnership by Secured Party; and (ii) allow Secured
Party to make any capital or other contributions or payments (collectively
"Subsequent Contributions") on behalf of Pledgor should Secured Party desire to
do so, in its sole discretion. From time to time upon Secured Party's request,
Pledgor shall give written notice to any or all Obligors containing such
additional information and instructions concerning Secured Party's rights under
this Agreement as may be specified by Secured Party. The notices referred to in
this Section shall be in such form as Secured Party shall specify. From time to
time and without notice to Pledgor, Secured Party shall have the right to give
notice to any Obligor containing such information and instructions concerning
Secured Party's rights under this Agreement as Secured Party determines to be
necessary or appropriate.
1.4 RIGHT TO CURE DEFAULTS. If Pledgor fails to perform any of its
obligations under the Partnership Agreement, Secured Party, at its option and in
its sole and absolute discretion, shall have the right, but not the obligation,
to pay or perform any or all of such obligations in such manner and to such
extent as Secured Party determines to be necessary or appropriate to preserve or
protect Secured Party's security interest in the Collateral. Pledgor shall
provide Secured Party with copies of all notices to Pledgor from the Partnership
or from the general partners of the Partnership within two business days after
Pledgor's receipt of each such notice, including copies of all notices
requesting payment of any Subsequent Contribution. All costs and expenses,
including attorneys' fees and the amount of any Subsequent Contribution made by
Secured Party on Pledgor's behalf, incurred by Secured Party in connection with
the payment or performance of such obligations or any Subsequent Contribution
shall be payable by Pledgor to Secured Party on Secured Party's demand, shall
bear interest at the highest rate applicable to the Obligations from the date of
expenditure, and shall be secured by the Collateral. Nothing contained in this
Agreement shall be construed to obligate Secured Party to make all or part of
any Subsequent Contribution or to pay or perform any of Pledgor's obligations
under the Partnership Agreement, and no election by Secured Party to do so in
any instance shall obligate Secured Party to do so in any other instance, nor
shall it constitute a waiver of the Pledgor's default or of Secured Party's
other rights and remedies.
1.5 NO LIABILITY BY SECURED PARTY. Nothing contained in this
Agreement shall render Secured Party directly or indirectly liable or
responsible to Pledgor, the Partnership, or any other person for (a) the
control, operation, or management of the Partnership, (b) the performance or
observance of any or all of Pledgor's duties, obligations, representations, or
warranties as a
2
<PAGE>
partner under the Partnership Agreement or any other agreement or document
relating to any or all of the Collateral, or (c) any failure or delay by
Secured Party in enforcing or collecting any payment or distribution of any
Partnership Proceeds. Secured Party shall have no duty to make any inquiry
as to the sufficiency of any Partnership Proceeds received by Secured Party
or to collect the same.
2. PLEDGOR'S COVENANTS.
2.1 PLEDGOR'S PARTNERSHIP OBLIGATIONS. Pledgor shall at all times
perform and discharge all obligations of Pledgor under the Partnership Agreement
in accordance with the terms thereof. Pledgor shall not enter into any
amendment or supplement to the Partnership Agreement, nor waive or modify any
rights thereunder, nor exercise any voting or other rights or options
thereunder, without Secured Party's prior written consent, which shall not be
unreasonably withheld. After the occurrence of any Event of Default, Secured
Party shall have the right (but not the obligation) to enter into any amendment
or supplement to the Partnership Agreement on behalf of Pledgor, waive or modify
any rights of Pledgor thereunder, and exercise any voting or other rights or
options of Pledgor thereunder.
2.2 INSPECTION. Secured Party and its representatives shall have
access to all of Pledgor's books and records included in or relating to the
Collateral, at all reasonable times, for the purposes of examination,
inspection, verification, copying and for any other reasonable purpose.
2.3 REPORTS. Pledgor shall deliver to Secured Party copies of all
financial statements, reports and other information concerning the Partnership
and the business and affairs of the Partnership received by Pledgor from time to
time within ten (10) days after Pledgor's receipt of each such item. From time
to time upon Secured Party's request, Pledgor shall deliver to Secured Party
such reports and information concerning the Partnership Interest and the
business and affairs of Pledgor as Secured Party may reasonably request. Such
reports shall be in such form, for such periods, contain such information, and
shall be rendered with such frequency as Secured Party may designate. All
reports and information provided to Secured Party by Pledgor shall be complete
and accurate in all respects at the time provided.
2.4 NOTICE OF ADVERSE CLAIMS. Pledgor shall immediately notify
Secured Party in writing of (a) any claim, demand, right, lien, security
interest or encumbrance arising with respect to any or all of the Collateral;
(b) any material adverse change in the value of the Collateral and any other
occurrence which may materially and adversely affect Secured Party's security
interest in the Collateral; and (c) any event or condition which constitutes an
Event of Default under this Agreement.
2.5 FURTHER ASSURANCES. Pledgor shall take all actions which may be
reasonably necessary or appropriate to maintain, preserve, protect, and defend
the Collateral and Secured Party's security interest therein, including all such
actions as may be requested by Secured Party. Upon Secured Party's request,
Pledgor shall execute and deliver to Secured Party such further documents and
agreements, in form and substance satisfactory to Secured Party, as Secured
Party may require to effectuate this Agreement or to evidence, perfect,
maintain, preserve or protect Secured Party's first-priority security interest
in the Collateral.
2.6 LITIGATION COOPERATION. If any suit, action or proceeding is
instituted by or against Secured Party with respect to any or all of the
Collateral by any third person, Pledgor,
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at such times and in such manner as may be designated by Secured Party, shall
fully cooperate with Secured Party and make itself and its employees and
agents available to Secured Party in order to prosecute or defend any such
suit, action or proceeding.
2.7 NEGATIVE COVENANTS. Without Secured Party's prior written
consent, Pledgor shall not take any of the following actions: (a) sell, lease,
transfer, assign, pledge, mortgage, encumber, hypothecate or otherwise dispose
of or abandon any or all of the Collateral; or (b) cause or permit any or all of
the Collateral to be subject to any lien, security interest, mortgage, pledge,
or encumbrance, except for the security interest granted to Secured Party under
this Agreement.
3. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants to
Secured Party that: (a) The sole Partnership Agreement of the Partnership is
the Partnership Agreement dated 1996 (but undated as to month and day) (the
"Partnership Agreement"), Pledgor has delivered true and correct copies of the
Partnership Agreement to Secured Party, the Partnership Agreement sets forth the
entirety of the agreement among the partners and any of them relating to the
Partnership and is presently in full force and effect; (b) Pledgor has an
undivided interest in the capital, profits, income and distributions of the
Partnership, as set forth in the Partnership Agreement; (c) Pledgor is not in
default in the performance or payment of any of his obligations under the
Partnership Agreement; (d) all financial statements and other information
provided by Pledgor to Secured Party concerning the Partnership have been true
and correct; (e) to the best of Pledgor's knowledge there is no litigation
pending or threatened against the Partnership or relating to the Partnership;
(e) No consent of any other person and no consent, approval, authorization or
other action by, or filing with, any governmental authority, bureau or agency is
required in connection with the execution, delivery and performance of Pledgor's
obligations under this Agreement; (f) Pledgor is the sole owner of, and has good
and marketable title to, the Partnership Interest and all other Collateral, and
the Partnership Interest and other Collateral is held free and clear and shall
at all times remain free and clear of all claims, demands, rights, liens,
security interests and encumbrances, other than the security interest granted to
Secured Party under this Agreement; (g) Pledgor's execution of this Agreement
and the performance of his obligations hereunder will not result in a breach or
violation of any law, governmental rule or regulation, judgment, writ,
injunction, decree or order of any court or governmental authority relating to
Pledgor or the Collateral, or the Partnership Agreement, or any agreement to
which Pledgor is a party or by which Pledgor is bound; and (h) There is no fact
which Pledgor has failed to disclose to Secured Party in writing which may
materially and adversely affect the properties, business, prospects, profits, or
condition of Pledgor or any of the Collateral, or may be necessary to disclose
in order to keep the representations and warranties made to Secured Party from
being misleading.
4. EVENTS OF DEFAULT; REMEDIES.
4.1 EVENTS OF DEFAULT. If any one or more of the following events
shall occur, any such event shall constitute an Event of Default and Pledgor
shall provide Secured Party with immediate notice thereof: Any Event of Default
under, or as defined in, the Loan Agreement or any other Loan Document shall
occur.
4.2. REMEDIES. If an Event of Default shall occur, Pledgor shall give
immediate written notice thereof to Secured Party. Upon the occurrence of an
Event of Default, and at any time thereafter, Secured Party shall have the
right, without notice to or demand upon Pledgor, to exercise any one or more of
the following remedies: collect all Partnership Proceeds
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and apply them to the Obligations in such order as Secured Party shall
determine in its sole discretion; sell or otherwise dispose of the
Collateral, at a public or private sale, for cash, or other property, or on
credit, with the authority to adjourn or postpone any such sale from time to
time without notice other than oral announcement at the time scheduled for
sale. Secured Party may directly or through any affiliate purchase the
Collateral, at any such public disposition, and if permissible under
applicable law, at any private disposition. Pledgor and Secured Party hereby
agree that it shall conclusively be deemed commercially reasonable for
Secured Party, in connection with any sale or disposition of the Collateral,
to impose restrictions and conditions as to the investment intent of a
purchaser or bidder, the ability of a purchaser or bidder to bear the
economic risk of an investment in the Collateral, the knowledge and
experience in business and financial matters of a purchaser or bidder, the
access of a purchaser or bidder to information concerning the Partnership, as
well as legend conditions and stop transfer instructions restricting
subsequent transfer of the Collateral, and any other restrictions or
conditions which Secured Party believes to be necessary or advisable in order
to comply with any state or federal securities or other laws. Pledgor
acknowledges that the foregoing restrictions may result in fewer proceeds
being received upon such sale then would otherwise be the case. Pledgor
hereby agrees to provide to Secured Party any and all information required by
Secured Party in connection with any sales of Collateral by Secured Party
hereunder. Any and all attorneys' fees, expenses, costs, liabilities and
obligations incurred by Secured Party in connection with the foregoing shall
be added to and become a part of the Obligations and shall be due from
Pledgor to Secured Party upon demand.
4.3. LIABILITY FOR DEFICIENCY. Pledgor shall at all times remain
liable for any deficiency remaining on the Obligations after any disposition of
any or all of the Collateral and after Secured Party's application of any
proceeds to the Obligations.
5. REMEDIES, CUMULATIVE; NO WAIVER. The failure of Secured Party to
enforce any of the provisions of this Agreement at any time or for any period of
time shall not be construed to be a waiver of any such provision or the right
thereafter to enforce the same. All remedies hereunder shall be cumulative and
shall be in addition to all rights, powers and remedies given to Secured Party
by law.
6. TERM. This Agreement and Secured Party's rights hereunder shall
continue in full force and effect until all of the Obligations have been fully
paid, performed and discharged and the Loan Agreement and all other Loan
Documents have been terminated.
7. POWER OF ATTORNEY. Pledgor irrevocably appoints Secured Party as the
attorney in fact of Pledgor, with full power of substitution, coupled with an
interest, with full power, in Secured Party's own name or in the name of
Pledgor, to execute and deliver all documents and instruments and take all
actions as Secured Party shall, in its discretion, deem necessary or advisable
in order to carry out the provisions or intent of this Agreement.
8. RELATIONSHIP OF PARTIES. Nothing contained in this Agreement
constitutes or shall be construed as (a) the formation of a partnership or joint
venture between Secured Party and Pledgor or any other person; or (b) the
creation of any confidential or fiduciary relationship of any kind between
Secured Party and Pledgor or any other Person. Secured Party shall not be
deemed to be a partner, joint venturer, trustee, or fiduciary with respect to
Pledgor or any other person as a result of this Agreement or the transactions
contemplated hereby. Pledgor acknowledges and agrees that Secured Party has at
all times acted only as a lender. Pledgor shall
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at all times have the right to determine and follow its own policies and
practices in the conduct of its business, subject to the terms and conditions
of this Agreement.
9. INDEMNIFICATION. Pledgor shall indemnify and hold Secured Party and
its agents, employees, officers, directors, attorneys, representatives,
affiliates, successors and assigns harmless from and against any and all claims,
demands, damages, liabilities, actions, causes of action, suits, costs and
expenses, including without limitation reasonable attorney's fees and costs,
arising out of or relating to Pledgor's breach of any of his obligations or
warranties under this Agreement or any other Loan Document, or any other act or
omission by Pledgor, or Secured Party's exercise of any or all of Secured
Party's rights or remedies under this Agreement or any other Loan Document.
10. ATTORNEYS' FEES. Upon Secured Party's demand, Pledgor shall reimburse
Secured Party for all reasonable costs and expenses, including reasonable
attorney's fees and costs, which are incurred by Secured Party, whether before
or after any Event of Default, in connection with any or all of the following:
(a) the exercise of any or all of Secured Party's rights and remedies under this
Agreement or any other Loan Document, whether or not any legal proceedings are
instituted by Secured Party; (b) the protection, preservation, management,
operation, or maintenance of any or all of the Collateral; (c) the sale or
disposition of any or all of the Collateral; (d) any suit, action, or proceeding
relating to Pledgor or the Collateral, or any of the Loan Documents, including
without limitation any action for relief from the automatic stay arising under
Bankruptcy Code Section362(a). Pledgor's obligation to reimburse Secured Party
under this Section shall include payment of interest on all amounts expended by
Secured Party from the date of expenditure at the highest rate of interest
applicable to any of the Obligations.
11. GENERAL PROVISIONS. This Agreement and the Loan Documents are the
entire and only agreements between Pledgor and Secured Party with respect to the
subject matter hereof, and all representations, warranties, agreements, or
undertakings heretofore or contemporaneously made, with respect to the subject
matter hereof, which are not set forth herein or therein, are superseded hereby.
All rights and remedies under this Agreement, the Loan Agreement and the other
Loan Documents are cumulative, and nothing in this Agreement limits any of the
terms or provisions of the Loan Agreement or the other Loan Documents. The
terms and provisions hereof may not be waived, altered, modified, or amended
except in a writing executed by Pledgor and Secured Party. All rights, benefits
and privileges hereunder shall inure to the benefit of and be enforceable by
Secured Party and its successors and assigns and shall be binding upon Pledgor
and its successors and assigns; provided that Pledgor may not transfer any of
its rights hereunder without the prior written consent of Secured Party.
Paragraph headings are used herein for convenience only. Pledgor acknowledges
that the same may not describe completely the subject matter of the applicable
paragraph, and the same shall not be used in any manner to construe, limit,
define or interpret any term or provision hereof. This Agreement and all acts
and transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed, and interpreted in accordance with the
internal laws (and not conflict of laws rules) of the State of California.
Pledgor hereby agrees that all actions or proceedings relating directly or
indirectly hereto may, at the option of Secured Party, be litigated in courts
located within said State, and Pledgor hereby expressly consents to the
jurisdiction of any such court and consents to the service of process in any
such action or proceeding by personal delivery or by certified or registered
mailing directed to Pledgor at its last address known to Secured Party.
12. MUTUAL WAIVER OF RIGHT TO JURY TRIAL AND OTHER WAIVERS. SECURED PARTY
AND PLEDGOR EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
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ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO:
(I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR
AGREEMENT BETWEEN SECURED PARTY AND PLEDGOR; OR (III) ANY CONDUCT, ACTS OR
OMISSIONS OF SECURED PARTY OR PLEDGOR OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SECURED
PARTY OR PLEDGOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE. Pledgor hereby waives: presentment for
payment, demand, protest, and notice thereof as to any instrument, and all
other notices and demands to which Pledgor might be entitled. Pledgor
further waives the benefit of all statutes of limitations.
IN WITNESS WHEREOF, the undersigned have executed this Pledge Agreement on
the date first above written.
Pledgor: Secured Party:
XIT Corporation Congress Financial Corporation (Western)
By By
------------------------- -------------------------
Title Title
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THE OFFER AND SALE OF THE SECURITIES REFERRED TO IN THIS AGREEMENT (THE
"OFFERING") HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND SUCH SHARES
ARE BEING OFFERED AND SOLD IN RELIANCE ON THE EXEMPTION FROM THE SECURITIES
REGISTRATION AND QUALIFICATION REQUIREMENTS OF THE ACT AND SUCH LAWS OFFERED
BY SECTION 4(2) OF THE ACT. ACCORDINGLY, THE SECURITIES MAY NOT BE
TRANSFERRED OR RESOLD WITHOUT REGISTRATION AND QUALIFICATION UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH
REGISTRATION AND QUALIFICATION UNDER THE ACT AND SUCH LAWS IS THEN AVAILABLE.
THE OFFER AND SALE OF THE SECURITIES EFFECTED HEREBY HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE
SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE
FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING.
SUBSCRIPTION AGREEMENT
MICROTEL INTERNATIONAL, INC.
CONVERTIBLE PREFERRED STOCK - SERIES A
- -------------------------------------------------------------------------------
THIS SUBSCRIPTION AGREEMENT (hereinafter the "Agreement") has been executed
by the undersigned (collectively the "Buyer") in connection with the sale of
certain Securities designated as Series A Convertible Preferred Stock
(hereinafter the "Preferred Shares"), which are convertible into shares of
common stock (hereinafter the "Conversion Shares") of MicroTel International,
Inc. (the "Company").
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE
1.1 Each Buyer hereby subscribes for the number of Preferred Shares set
forth below on the signature page of this Agreement which Preferred Shares
shall be convertible into Conversion Shares of the Company in accordance with
the terms set forth in the Certificate of Designations, Rights and
Preferences of Preferred Stock attached as Exhibit A to this Agreement (the
"Conversion Shares"), at a purchase price of $10,000 per Preferred Share
payable in United States Dollars.
1.2 Buyer shall pay the purchase price by delivering same day funds in
United States Dollars to the Company upon delivery of the Preferred Shares by
the Company to Buyer.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES.
2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants that as of the date of this Agreement:
(a) EXISTENCE. The Company is a corporation duly organized and in
good standing under the laws of the State of Delaware and is duly
qualified to do business and is in good standing in all states where
such qualification is necessary, except for those jurisdictions in which
the failure to qualify would not, in the aggregate, have a material
adverse effect on the Company's financial condition, results of
operations or business.
(b) AUTHORITY. The execution and delivery by the Company of this
Agreement and the Preferred Stock (i) are within the Company's
corporate powers; (ii) are duly authorized by the Company's board of
directors; (iii) are not in contravention of the terms of the Company's
certificate of incorporation or bylaws; (iv) are not in contravention of
any law or laws; (v) except for the filing of a Form D Notice with the
Securities and Exchange Commission and any exemption filing related
thereto which may be required pursuant to applicable state securities or
"blue sky" laws, do not require any governmental consent, registration
or approval; (vi) do not contravene any contractual or governmental
restriction binding upon the Company; and (vii) will not result in the
imposition of any lien, charge, security interest or encumbrance upon
any property of the Company under any existing indenture, mortgage, deed
of trust, loan or credit agreement or other material agreement or
instrument to which the Company is a party or by which the Company or
any of the Company's property may be bound or affected.
(c) BINDING EFFECT. This Agreement has been duly authorized,
executed and delivered by the Company and constitutes the valid and
legally binding obligation of the Company, enforceable in accordance
with its terms, subject to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors'
rights and to general equity principles.
(d) CAPITALIZATION. The authorized capital stock of the Company
consists of 25,000,000 shares of Common Stock, par value $.0033 per
share, 11,927,793 shares of which are issued and outstanding and
10,000,000 shares of Preferred Stock, par value $.01 per share, of which
none are outstanding. The shares of common stock issuable upon
conversion of the Preferred Stock (the "Conversion Shares") have been
duly and validly authorized and reserved for issuance and, when issued
and delivered in accordance with the terms of this Agreement, will be
duly and validly issued, fully paid and non-assessable.
(e) SEC DOCUMENTS. The Company has furnished each Buyer with a
true and complete copy of the Company's Report on Form 10-K for the
fiscal year ended December 31, 1997 and Form 10-Q for the quarter ended
March 31, 1998 (the "Disclosure Documents"). Except as disclosed in the
Disclosure Documents, since December 31, 1997 the Company has not
incurred any material liability except in the
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ordinary course of its business consistent with past practice and there
has not been any change in the business, financial condition or results
of operations of the Company which has had a material adverse effect on
the Company. Since January 1, 1997, the Company has filed with the
Securities and Exchange Commission (the "SEC") all documents required to
be filed pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations promulgated
thereunder. As of their respective dates, the Disclosure Documents
complied in all material respects with the requirements of the Exchange
Act, and the rules and regulations of the SEC thereunder applicable to
such Disclosure Documents, and the Disclosure Documents did not contain
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the
Disclosure Documents (the "Financial Statements") comply as to form in
all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto.
The Financial Statements are accurate, complete and have been prepared
in accordance with the books and records of the Company and in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except as may be indicated
in the notes thereto and fairly present (subject, in the case of the
unaudited statements, to normal, recurring audit adjustments that are
not material) the consolidated financial position of the Company as at
the dates thereof and the consolidated results of its operations and
cash flows for the periods then ended.
(f) LITIGATION. Except as set forth in the Disclosure Documents,
there is neither pending nor, to the Company's knowledge and belief,
threatened any action, suit, proceeding or claim, or any basis therefor,
to which the Company is or may be named as a party or its property is or
may be subject or which calls into question any of the transactions
contemplated by this Agreement.
(g) SECURITIES MATTERS. Subject to the accuracy of the
representations of the Buyers set forth in Section 2.2 hereof, the
offer, sale and issuance of the Preferred Stock and the Conversion
Shares as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act of 1933 as amended (the
"Securities Act"). The Company has complied and will comply with all
applicable state "blue sky" or securities laws in connection with the
offer, sale and issuance of the Preferred Stock and the Conversion
Shares as contemplated by this Agreement.
(h) CERTIFICATES. The Company will issue one or more Certificates
representing the Preferred Shares in the name of Buyer with the
following restrictive legend set forth below (the "Restrictive Legend")
in such denominations to be specified by the Buyer:
"The Securities represented by this Certificate have not
been registered under the United States Securities Act of
1933 (the "Act") and may not be sold, transferred, pledged
or otherwise
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hypothecated unless (a) they are covered by a registration
statement or a post-effective amendment thereto under the Act, or
(b) in the opinion of counsel for Buyer, which opinion shall be
reasonably acceptable to the Company, such sale, transfer, pledge
or hypothecation is otherwise exempt from the provisions of Section
5 of the Act."
(i) CONVERSION. Within two full business days of receipt by the
Company of a properly executed request for conversion in the form
annexed as Exhibit B hereto accompanied by the Preferred Shares to be
converted, the Company will deliver to its transfer agent its directive
and authorization to execute the conversion and to issue to Buyer the
common stock shares so authorized.
The Company acknowledges that a delay in issuance of its
authorization and directive for the conversion could result in economic
loss to the Buyer. Therefore, as compensation to the Buyer for such
loss, in the event that the Company fails to deliver said authorization
and directive within two full business days, the Company agrees to pay
liquidated damages to the Buyer for late issuance of said authorization
and directive in the amount of $500 per day for each day of delay after
three days, up to a maximum of $10,000 per conversion request. Nothing
herein shall create a liability to the Company for actions or delays of
the transfer agent once the authorization and directive have been
delivered to it by the Company. Any liquidated damages due Buyer will
be paid within seven (7) days of issuance of the shares resulting from
the conversion.
(j) ISSUANCE OF SHARES. Upon conversion of the Preferred Shares,
the Company will issue one or more certificates representing the
Conversion Shares in the name of the Buyer without restrictive legend,
except as may otherwise be required by applicable law, rule or
regulation, and in DTC eligible form, in such denominations to be
specified by the Buyer prior to conversion provided Buyer represents to
the Company that resale of the Conversion Shares will be made only in
compliance with applicable securities laws. Company further warrants
that no instructions other than these instructions, and instructions for
a "stop transfer" for any sale of Conversion Shares in excess of those
permitted to be sold under Section 2.2(c), have been given to the
transfer agent and also warrants that the Conversion Shares shall
otherwise be freely transferable on the books and records of the Company
subject to compliance with Federal and State securities laws.
2.2 REPRESENTATIONS AND WARRANTIES OF THE BUYER. Each Buyer represents
and warrants that as of the date of the execution of this Agreement:
(a) AUTHORIZATION. This Agreement constitutes a valid and legally
binding obligation of such Buyer.
(b) INVESTMENT REPRESENTATIONS (i) The Buyer has received and
reviewed the Company's Disclosure Documents and the Buyer or the Buyer's
designated
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representatives have concluded a satisfactory due diligence
investigation of the Company and have had an opportunity to have all
their questions regarding the Company satisfactorily answered.
(ii) The Buyer acknowledges that the Preferred Stock and the
Conversion Shares are speculative and involve a high degree of risk
and the Buyer represents that it is able to sustain the loss of the
entire amount of its investment.
(iii) The Buyer (or its members and/or officers) has
previously invested in unregistered securities and has sufficient
financial and investing expertise to evaluate and understand the risks
of the Preferred Stock and the Conversion Shares.
(iv) The Buyer has received from the Company, and is relying
on, no representations (except as set forth in this Agreement) or
projections with respect to the Company's business and prospects.
(v) The Buyer is an "accredited investor" within the
meaning of Regulation D under the Securities Act.
(vi) The Buyer is acquiring the Preferred Stock and the
Conversion Shares for investment purposes only without intent to
distribute the same, and acknowledges that the Preferred Stock and the
Conversion Shares have not been registered under the Securities Act
and applicable state securities laws, and accordingly, constitute
"restricted securities" for purposes of the Securities Act and such
state securities laws.
(vii) The Buyer acknowledges that it will not be able to
transfer the Preferred Stock and the Conversion Shares except upon
compliance with the registration requirements of the Securities Act
and applicable state securities laws or exemptions therefrom.
(viii) The certificates and/or instruments evidencing the
Preferred Stock and the Conversion Shares will contain a legend to the
foregoing effect.
(c) LOCK-UP. The Buyer will not transfer any Preferred Shares or
Conversion Shares for a period of ninety (90) days after the date of the
Closing. No more than 20% of the aggregate number of Series A Preferred
Shares originally purchased and owned by the Buyer may be converted in any
thirty (30) day period, on a cumulative basis, after the ninetieth (90th)
day of issuance. Further, the Buyer will not, after conversion, sell more
than 20% of the Conversion Shares owned by it in any thirty day period, on
a cumulative basis, commencing with the ninety-first (91st) day after the
Closing.
3. CLOSING
3.1 The Buyer understands that the Company's obligation to sell the
Preferred Shares
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is conditioned upon delivery by the Buyer to the Company of the purchase
price set forth in Section 1 herein.
3.2 The Company understands that Buyer's obligation to purchase the
Preferred Shares is conditioned upon delivery of certificate(s) representing
the Preferred Shares as described herein, and provision of an opinion of
counsel as provided in Subsection D (ii) herein below.
3.3 For this transaction to close, the Buyer must:
(i) Wire funds to the Pacific Continental Securities
Corporation, as Escrow Agent (the "Escrow Agent"), in the amount of
Five Hundred Thousand U.S. dollars ($500,000) (the "Purchase Price")
no later than 72 hours after receipt by the Company of the
Subscription Agreement executed by the Buyer and the Company. Wire
transfer instructions for the Escrow Agent are annexed as Exhibit C
hereto.
(ii) Deliver a signed Subscription Agreement.
3.4 For this transaction to close, the Company must:
(i) Deliver to the Buyer Certificate(s) for the Preferred
Shares.
(ii) Deliver to the Buyer the Company's Certificate of
Designation set forth in Exhibit A hereto.
(iii) Deliver to the Buyer an opinion letter from the
Company's counsel stating that (a) the Company is duly incorporated
and validly existing; (b) this Agreement, the issuance of the
Preferred Shares, and the issuance of the Common Stock upon conversion
of the Preferred Shares up to the number of shares of common stock
authorized in the Company's Certificate of Incorporation, have been
duly approved by all required corporate action, and that all such
securities upon due issuance, shall be validly issued and outstanding,
fully paid and nonassessable, and in each case, having the rights,
preferences and privileges set forth in the Certificate of
Incorporation; and (c) this Agreement is a valid and binding
obligation of the Company, enforceable in accordance with its terms,
except as enforceability of any indemnification provisions may be
limited by principles of public policy, and subject to laws of general
application relating to bankruptcy, insolvency and the relief of
debtors and rules of laws governing specific performance and other
equitable remedies; and
(iv) Deliver to the Buyer a signed Subscription Agreement
which shall be signed after execution of such Subscription Agreement
by Buyer; and
(v) Deliver to the Buyer executed warrants to purchase
common stock
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of the Company in the form attached hereto as Exhibit D (the
"Warrants").
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3.5 Upon confirmation by Buyer that it has received each of the items
set forth in 3.4(i)-(v), and by the Company that it has received a signed
Subscription Agreement, Escrow Agent shall, after deducting any amounts due
to it from the Company, release the balance of the purchase price to the
Company or as directed by the Company.
E. Pacific Continental Securities Corporation shall serve as agent
(the "Agent") in the transaction contemplated by this Agreement.
Agent's fee is solely the responsibility of the Company and Company
expressly agrees to pay Agent said fee as such is agreed upon between
the Company and the Agent. Neither the Company nor the Agent has any
recourse of any kind whatsoever against the Buyer for any monies owed
the Agent by the Company or for any monies paid by the Company to the
Agent. Company expressly indemnifies Buyer against any monies owed the
Agent.
4. REGISTRATION OF CONVERSION SHARES
4.1 The Company shall prepare and file with the SEC a registration
statement as soon as practical, which registration statement shall include
the Conversion Shares and shares of Common Stock issuable pursuant to the
Warrants ("Warrant Shares") and shall thereafter use its best efforts to have
such registration statement declared effective within 90 days after the
Closing Date (the "Target Date") and remain effective until the earlier of
the date on which all the Conversion Shares are sold or two years after the
Closing Date (the "Effective Period"). The Company shall prepare and file
with the SEC such amendments and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to keep
such registration statement effective throughout the Effective Period and to
comply with the provisions of the Securities Act with respect to the sale or
other disposition of the Conversion Shares or Warrant Shares covered by such
registration statement whenever the Buyer shall desire to sell or otherwise
dispose of the same.
4.2 If a registration statement covering all Shares is not effective by
the Target Date, the Company shall pay to the Buyers as liquidated damages an
aggregate amount equal to one percent ( 1%) of the total purchase price of
the Preferred Stock for each thirty (30) day period following the Target Date
until such time as the registration statement is declared effective. The
payment set forth above shall be pro-rated daily as to any period of less
than thirty (30) days. Such payment shall be made to each Buyer by cashier's
check or wire transfer in immediately available funds to such account as
shall be designated in writing by the Buyer and shall be paid irrespective of
the amount of Preferred Stock, Conversion Shares and Warrant Shares held by
Buyer on the Target Date and thereafter.
4.3 Any amount payable pursuant to the foregoing provisions shall be
delivered on or before the fifth (5th) day following the end of the calendar
month in which such payment or delivery obligation arose.
4.4 The Company shall file a request for acceleration of effectiveness
of the registration statement within five days after it has received a no
review/no further comment determination from the SEC.
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4.5 It shall be a condition precedent to the obligation of the Company
to register any Conversion Shares and Warrant Shares pursuant to this Section
4 that Buyer shall furnish to the Company such information regarding the
Conversion Shares and Warrant Shares held and the intended method of
disposition thereof and other information concerning the Buyer as the Company
shall reasonably request and as shall be required in connection with the
registration statement to be filed by the Company. If after a registration
statement becomes effective the Company advises the Buyer that the Company
considers it appropriate to amend or supplement the applicable registration
statement, the Buyer shall suspend further sales of the Conversion Shares and
Warrant Shares until the Company advises the Buyer that such registration
statement has been amended or supplemented.
4.6 Whenever the Company is required by the provisions of this Section
4 to effect the registration of the Conversion Shares and Warrant Shares
under the Securities Act, the Company shall:
(i) Prepare and file with the SEC a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective;
(ii) Prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus contained
therein as may be necessary to keep such registration statement
effective;
(iii) Furnish to the Buyer and to the underwriters (if any)
of the securities being registered such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus
and such other documents as the Buyer may reasonably request in order
to facilitate the public offering of such securities;
(iv) Use its best efforts to register or qualify the
securities covered by such registration statement under such state
securities or Blue Sky Laws of such jurisdictions as the Buyer may
reasonably request within twenty (20) days following the original
filing of such registration statement, except that the Company shall
not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(v) Notify the Buyer, promptly after it shall receive
notice thereof, of the time when such registration statement has
become effective or a supplement to any prospectus forming a part of
such registration statement has been filed;
(vi) Notify the Buyer promptly of any request by the SEC for
the amending or supplementing of such registration statement or
prospectus or for additional information; and
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(vii) Prepare and promptly file with the SEC and promptly
notify the Buyer of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct
any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities
Act, any event shall have occurred as the result of which any such
prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
4.7 With respect to the inclusion of the Conversion Shares and Warrant
Shares in a registration statement pursuant to this Section 4, all
registration expenses, fees, costs and expenses of and incidental to such
registration, inclusion and public offering in connection therewith shall be
borne by the Company; provided, however, that the Buyer shall bear its own
professional fees and pro rata share of the underwriting discount and
commissions, if any. The fees, costs and expenses of registration to be
borne by the Company shall include, without limitation, all registration,
filing, printing expenses, fees and disbursements of counsel and accountants
for the Company, fees and disbursements of counsel for the underwriter or
underwriters of such securities (if any and if the Company and/or selling
security holders are required to bear such fees and disbursements), and all
legal fees and disbursements and other expenses of complying with state
securities or Blue Sky Laws of any jurisdiction in which the securities to be
offered are to be registered or qualified.
4.8 Subject to the conditions set forth below, in connection with any
registration of the Shares pursuant to this Section 4, the Company agrees to
indemnify and hold harmless the Buyer, any underwriter for the Company or
acting on behalf of the Buyer and each person, if any, who controls the
Buyer, within the meaning of Section 15 of the Securities Act, as follows:
(i) Against any and all loss, claim, damage and expense
whatsoever arising out of or based upon (including, but not limited
to, any and all expense whatsoever reasonably incurred in
investigating, preparing or defending any litigation, commenced or
threatened, or any claim whatsoever based upon) any untrue or alleged
untrue statement of a material fact contained in any preliminary
prospectus (if used prior to the effective date of the registration
statement), the registration statement or the prospectus (as from time
to time amended and supplemented), or in any application or other
document executed by the Company or based upon written information
furnished by the Company filed in any jurisdiction in order to qualify
the Company's securities under the securities laws thereof, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading, or any other violation of applicable federal or state
statutory or regulatory requirements or limitations relating to action
or inaction by the Company in the course of preparing, filing, or
implementing such registered offering; provided, however, that the
indemnity agreement contained in this section shall not apply to
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any loss, claim, damage, liability or action arising out of or
based upon any untrue or alleged untrue statement or omission made
in reliance upon and in conformity with any information furnished
in writing to the Company by or on behalf of the Buyer expressly
for use in connection therewith or arising out of any action or
inaction of the Buyer;
(ii) Subject to the proviso contained in Subsection (i)
above, against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid in
settlement of any litigation, commenced or threatened, or of any
claim whatsoever based upon any untrue statement or omission
(including, but not limited to, any and all expense whatsoever
reasonably incurred in investigating, preparing or defending
against any such litigation or claim) if such settlement is
effected with the written consent of the Company; and
(iii) In no case shall the Company be liable under this
indemnity agreement with respect to any claim made against such
Company, underwriter or any such controlling person unless the
Company shall be notified, by letter or by facsimile confirmed by
letter, of any action commenced against such persons, promptly
after such person shall have been served with the summons or other
legal process giving information as to the nature and basis of the
claim. The failure to so notify the Company, if prejudicial in any
material respect to the Company's ability to defend such claim,
shall relieve the Company from its liability to the indemnified
person under this Section 4, but only to the extent that the
Company was prejudiced. The failure to so notify the Company shall
not relieve the Company from any liability which it may have
otherwise than on account of this indemnity agreement. The Company
shall be entitled to participate at its own expense in the defense
of any suit brought to enforce any such claim, but if the Company
elects to assume the defense, such defense shall be conducted by
counsel chosen by it, provided such counsel is reasonably
satisfactory to the Company or controlling persons, defendants in
any suit so brought. In the event the Company elects to assume the
defense of any such suit and retain such counsel, the Company,
underwriter or controlling persons, defendants in the suit, shall,
after the date they are notified of such election, bear the fees
and expenses of any counsel thereafter retained by them, as well as
any other expenses thereafter incurred by them in connection with
the defense thereof; provided, however, that if the Company,
underwriter or controlling persons reasonably believe that there
may be available to them any defense or counterclaim different than
those available to the Company or that representation of such
Company, underwriters or controlling persons by counsel for the
Company presents a conflict of interest for such counsel, then such
Company, underwriter and controlling person shall be entitled to
defend such suit with counsel of their own choosing and the Company
shall bear the fees, expenses and other costs of such separate
counsel.
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4.9 Each Buyer agrees to indemnify and hold harmless the Company, each
underwriter for the offering, (if any), and each of their officers and
directors and agents and each other person, if any, who controls the Company
and underwriter within the meaning of Section 15 of the Securities Act
against any and all such losses, liabilities, claims, damages and expenses as
are indemnified against by the Company under Section 4.6 above; provided,
however, that such indemnification by Buyer hereunder shall be limited to any
losses, liabilities, claims, damages, or expenses to the extent caused by any
untrue statement of a material fact or omission of a material fact (required
to be stated therein or necessary to make statements therein not misleading),
if any made (or in settlement of any litigation effected with the written
consent of such Company, alleged to have been made) in any preliminary
prospectus, the registration statement or prospectus or any amendment or
supplement thereof or in any application or other document in reliance upon,
and in conformity with, written information furnished in respect of such
Company by or on behalf of such Company expressly for use in any preliminary
prospectus, the registration statement or prospectus or any amendment or
supplement thereof or in any such application or other document or arising
out of any action or inaction of such Company in implementing such registered
offering. Notwithstanding the foregoing, the indemnification obligation of
each Buyer shall not exceed the purchase price of the Notes paid by such
Buyer. In case any action shall be brought against the Company, or any other
person so indemnified, in respect of which indemnity may be sought against
any Company, such Company shall have the rights and duties given to the
Company, and each other person so indemnified shall have the rights and
duties given to the Buyer, by the provisions of Section 4.6. The person
indemnified agrees to notify the Company promptly after the assertion of any
claim against the person indemnified in connection with the sale of
securities.
4.10 If the indemnification provided for in Sections 4.8 and 4.9 above
are unavailable or insufficient to hold harmless an indemnified party in
respect of any losses, claims, damages or liabilities (or actions in respect
thereof) referred to therein, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (or actions in respect thereof) in
such proportion as is appropriate to reflect the relative fault of the
indemnified party, on one hand, and such indemnifying party, on the other
hand, in connection with the statements or omissions which resulted in such
losses, claims, damages, or liabilities (or actions in respect thereof). The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnified party, on one hand, or such indemnifying party,
on the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
No person who has committed fraudulent misrepresentation (within the meaning
of the Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof referred to above in this Section
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim.
5. CLOSING DATE
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The Preferred Share certificate shall be delivered to Buyer and the
funds therefore shall be delivered to Company on or before May 22, 1998 (the
"Closing Date") or at such other time mutually agreed to by the parties. 6.
GOVERNING LAW; INTERPRETATION
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Delaware. Facsimile signatures of this Agreement
shall be binding on all parties hereto. 7. ENTIRE AGREEMENT; AMENDMENT
This Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof, and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or
therein. Except as expressly provided herein, neither this Agreement nor any
term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought.
8. NOTICES; ETC.
Any notice, demand or request required or permitted to be given by
either the Company or the Buyer pursuant to the terms of this Agreement shall
be in writing and shall be deemed given when delivered personally or by
facsimile, with a hard copy to follow by two day courier addressed to the
parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other
in writing.
9. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
10. SEVERABILITY
In the event that any provision of this Agreement becomes or is declared
by a court of competent jurisdiction to be illegal, enforceable or void, this
Agreement shall continue in full force and effect without said provision,
provided that no such severability shall be effective if it materially
changes the economic benefit of this Agreement to any party.
11. TITLES AND SUBTITLES
The titles and subtitles used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this
Agreement.
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IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above, as confirmed by signatory below. Facsimile signatures of this
agreement shall be binding on all parties hereto.
Official Signatory of Company:
MICROTEL INTERNATIONAL, INC.
4290 East Brickell Street
Ontario, California 91761
By:
----------------------------------------
Carmine T. Oliva
President and Chief Executive Officer
FORTUNE FUND LIMITED SEEKER III
By:
----------------------------------------
Number of Shares of
Series A Preferred: 50
<PAGE>
THE OFFER AND SALE OF THE SECURITIES REFERRED TO IN THIS AGREEMENT (THE
"OFFERING") HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND SUCH SHARES
ARE BEING OFFERED AND SOLD IN RELIANCE ON THE EXEMPTION FROM THE SECURITIES
REGISTRATION AND QUALIFICATION REQUIREMENTS OF THE ACT AND SUCH LAWS OFFERED
BY SECTION 4(2) OF THE ACT. ACCORDINGLY, THE SECURITIES MAY NOT BE
TRANSFERRED OR RESOLD WITHOUT REGISTRATION AND QUALIFICATION UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH
REGISTRATION AND QUALIFICATION UNDER THE ACT AND SUCH LAWS IS THEN AVAILABLE.
THE OFFER AND SALE OF THE SECURITIES EFFECTED HEREBY HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE
SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE
FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING.
SUBSCRIPTION AGREEMENT
MICROTEL INTERNATIONAL, INC.
CONVERTIBLE PREFERRED STOCK - SERIES A
- -------------------------------------------------------------------------------
THIS SUBSCRIPTION AGREEMENT (hereinafter the "Agreement") has been executed
by the undersigned (collectively the "Buyer") in connection with the sale of
certain Securities designated as Series A Convertible Preferred Stock
(hereinafter the "Preferred Shares"), which are convertible into shares of
common stock (hereinafter the "Conversion Shares") of MicroTel International,
Inc. (the "Company").
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE
1.1 Each Buyer hereby subscribes for the number of Preferred Shares set
forth below on the signature page of this Agreement which Preferred Shares
shall be convertible into Conversion Shares of the Company in accordance with
the terms set forth in the Certificate of Designations, Rights and
Preferences of Preferred Stock attached as Exhibit A to this Agreement (the
"Conversion Shares"), at a purchase price of $10,000 per Preferred Share
payable in United States Dollars.
1.2 Buyer shall pay the purchase price by delivering same day funds in
United States Dollars to the Company upon delivery of the Preferred Shares by
the Company to Buyer.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES.
2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants that as of the date of this Agreement:
(a) EXISTENCE. The Company is a corporation duly organized and in
good standing under the laws of the State of Delaware and is duly qualified
to do business and is in good standing in all states where such
qualification is necessary, except for those jurisdictions in which the
failure to qualify would not, in the aggregate, have a material adverse
effect on the Company's financial condition, results of operations or
business.
(b) AUTHORITY. The execution and delivery by the Company of this
Agreement and the Preferred Stock (i) are within the Company's corporate
powers; (ii) are duly authorized by the Company's board of directors; (iii)
are not in contravention of the terms of the Company's certificate of
incorporation or bylaws; (iv) are not in contravention of any law or laws;
(v) except for the filing of a Form D Notice with the Securities and
Exchange Commission and any exemption filing related thereto which may be
required pursuant to applicable state securities or "blue sky" laws, do not
require any governmental consent, registration or approval; (vi) do not
contravene any contractual or governmental restriction binding upon the
Company; and (vii) will not result in the imposition of any lien, charge,
security interest or encumbrance upon any property of the Company under any
existing indenture, mortgage, deed of trust, loan or credit agreement or
other material agreement or instrument to which the Company is a party or
by which the Company or any of the Company's property may be bound or
affected.
(c) BINDING EFFECT. This Agreement has been duly authorized,
executed and delivered by the Company and constitutes the valid and legally
binding obligation of the Company, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
(d) CAPITALIZATION. The authorized capital stock of the Company
consists of 25,000,000 shares of Common Stock, par value $.0033 per share,
11,927,793 shares of which are issued and outstanding and 10,000,000 shares
of Preferred Stock, par value $.01 per share, of which none are
outstanding. The shares of common stock issuable upon conversion of the
Preferred Stock (the "Conversion Shares") have been duly and validly
authorized and reserved for issuance and, when issued and delivered in
accordance with the terms of this Agreement, will be duly and validly
issued, fully paid and non-assessable.
(e) SEC DOCUMENTS. The Company has furnished each Buyer with a true
and complete copy of the Company's Report on Form 10-K for the fiscal year
ended December 31, 1997 and Form 10-Q for the quarter ended March 31, 1998
(the "Disclosure Documents"). Except as disclosed in the Disclosure
Documents, since December 31, 1997 the Company has not incurred any
material liability except in the
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ordinary course of its business consistent with past practice and there
has not been any change in the business, financial condition or results
of operations of the Company which has had a material adverse effect on the
Company. Since January 1, 1997, the Company has filed with the Securities
and Exchange Commission (the "SEC") all documents required to be filed
pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations promulgated thereunder. As
of their respective dates, the Disclosure Documents complied in all
material respects with the requirements of the Exchange Act, and the rules
and regulations of the SEC thereunder applicable to such Disclosure
Documents, and the Disclosure Documents did not contain any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The financial statements of the Company included in the Disclosure
Documents (the "Financial Statements") comply as to form in all material
respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto. The Financial
Statements are accurate, complete and have been prepared in accordance
with the books and records of the Company and in accordance with
generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may be indicated in the notes
thereto and fairly present (subject, in the case of the unaudited
statements, to normal, recurring audit adjustments that are not material)
the consolidated financial position of the Company as at the dates thereof
and the consolidated results of its operations and cash flows for the
periods then ended.
(f) LITIGATION. Except as set forth in the Disclosure Documents,
there is neither pending nor, to the Company's knowledge and belief,
threatened any action, suit, proceeding or claim, or any basis therefor, to
which the Company is or may be named as a party or its property is or may
be subject or which calls into question any of the transactions
contemplated by this Agreement.
(g) SECURITIES MATTERS. Subject to the accuracy of the
representations of the Buyers set forth in Section 2.2 hereof, the offer,
sale and issuance of the Preferred Stock and the Conversion Shares as
contemplated by this Agreement are exempt from the registration
requirements of the Securities Act of 1933 as amended (the "Securities
Act"). The Company has complied and will comply with all applicable state
"blue sky" or securities laws in connection with the offer, sale and
issuance of the Preferred Stock and the Conversion Shares as contemplated
by this Agreement.
(h) CERTIFICATES. The Company will issue one or more Certificates
representing the Preferred Shares in the name of Buyer with the following
restrictive legend set forth below (the "Restrictive Legend") in such
denominations to be specified by the Buyer:
"The Securities represented by this Certificate have not
been registered under the United States Securities Act of
1933 (the "Act") and may not be sold, transferred, pledged
or otherwise
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hypothecated unless (a) they are covered by a registration
statement or a post-effective amendment thereto under the
Act, or (b) in the opinion of counsel for Buyer, which
opinion shall be reasonably acceptable to the Company,
such sale, transfer, pledge or hypothecation is otherwise
exempt from the provisions of Section 5 of the Act."
(i) CONVERSION. Within two full business days of receipt by the
Company of a properly executed request for conversion in the form annexed
as Exhibit B hereto accompanied by the Preferred Shares to be converted,
the Company will deliver to its transfer agent its directive and
authorization to execute the conversion and to issue to Buyer the common
stock shares so authorized.
The Company acknowledges that a delay in issuance of its authorization
and directive for the conversion could result in economic loss to the
Buyer. Therefore, as compensation to the Buyer for such loss, in the event
that the Company fails to deliver said authorization and directive within
two full business days, the Company agrees to pay liquidated damages to the
Buyer for late issuance of said authorization and directive in the amount
of $500 per day for each day of delay after three days, up to a maximum of
$10,000 per conversion request. Nothing herein shall create a liability to
the Company for actions or delays of the transfer agent once the
authorization and directive have been delivered to it by the Company. Any
liquidated damages due Buyer will be paid within seven (7) days of issuance
of the shares resulting from the conversion.
(j) ISSUANCE OF SHARES. Upon conversion of the Preferred Shares, the
Company will issue one or more certificates representing the Conversion
Shares in the name of the Buyer without restrictive legend, except as may
otherwise be required by applicable law, rule or regulation, and in DTC
eligible form, in such denominations to be specified by the Buyer prior to
conversion provided Buyer represents to the Company that resale of the
Conversion Shares will be made only in compliance with applicable
securities laws. Company further warrants that no instructions other than
these instructions, and instructions for a "stop transfer" for any sale of
Conversion Shares in excess of those permitted to be sold under Section
2.2(c), have been given to the transfer agent and also warrants that the
Conversion Shares shall otherwise be freely transferable on the books and
records of the Company subject to compliance with Federal and State
securities laws.
2.2 REPRESENTATIONS AND WARRANTIES OF THE BUYER. Each Buyer represents
and warrants that as of the date of the execution of this Agreement:
(a) AUTHORIZATION. This Agreement constitutes a valid and legally
binding obligation of such Buyer.
(b) INVESTMENT REPRESENTATIONS (i) The Buyer has received and
reviewed the Company's Disclosure Documents and the Buyer or the Buyer's
designated
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representatives have concluded a satisfactory due diligence investigation
of the Company and have had an opportunity to have all their questions
regarding the Company satisfactorily answered.
(ii) The Buyer acknowledges that the Preferred Stock and the
Conversion Shares are speculative and involve a high degree of risk
and the Buyer represents that it is able to sustain the loss of the
entire amount of its investment.
(iii) The Buyer (or its members and/or officers) has
previously invested in unregistered securities and has sufficient
financial and investing expertise to evaluate and understand the risks
of the Preferred Stock and the Conversion Shares.
(iv) The Buyer has received from the Company, and is relying
on, no representations (except as set forth in this Agreement) or
projections with respect to the Company's business and prospects.
(v) The Buyer is an "accredited investor" within the
meaning of Regulation D under the Securities Act.
(vi) The Buyer is acquiring the Preferred Stock and the
Conversion Shares for investment purposes only without intent to
distribute the same, and acknowledges that the Preferred Stock and the
Conversion Shares have not been registered under the Securities Act
and applicable state securities laws, and accordingly, constitute
"restricted securities" for purposes of the Securities Act and such
state securities laws.
(vii) The Buyer acknowledges that it will not be able to
transfer the Preferred Stock and the Conversion Shares except upon
compliance with the registration requirements of the Securities Act
and applicable state securities laws or exemptions therefrom.
(viii) The certificates and/or instruments evidencing the
Preferred Stock and the Conversion Shares will contain a legend to the
foregoing effect.
(c) LOCK-UP. The Buyer will not transfer any Preferred Shares or
Conversion Shares for a period of ninety (90) days after the date of the
Closing. No more than 20% of the aggregate number of Series A Preferred
Shares originally purchased and owned by the Buyer may be converted in any
thirty (30) day period, on a cumulative basis, after the ninetieth (90th)
day of issuance. Further, the Buyer will not, after conversion, sell more
than 20% of the Conversion Shares owned by it in any thirty day period, on
a cumulative basis, commencing with the ninety-first (91st) day after the
Closing.
3. CLOSING
3.1 The Buyer understands that the Company's obligation to sell the
Preferred Shares
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<PAGE>
is conditioned upon delivery by the Buyer to the Company of the purchase price
set forth in Section 1 herein.
3.2 The Company understands that Buyer's obligation to purchase the
Preferred Shares is conditioned upon delivery of certificate(s) representing the
Preferred Shares as described herein, and provision of an opinion of counsel as
provided in Subsection D (ii) herein below.
3.3 For this transaction to close, the Buyer must:
(i) Wire funds to the Pacific Continental Securities
Corporation, as Escrow Agent (the "Escrow Agent"), in the amount of
Five Hundred Thousand U.S. dollars ($500,000) (the "Purchase Price")
no later than 72 hours after receipt by the Company of the
Subscription Agreement executed by the Buyer and the Company. Wire
transfer instructions for the Escrow Agent are annexed as Exhibit C
hereto.
(ii) Deliver a signed Subscription Agreement.
3.4 For this transaction to close, the Company must:
(i) Deliver to the Buyer Certificate(s) for the Preferred
Shares.
(ii) Deliver to the Buyer the Company's Certificate of
Designation set forth in Exhibit A hereto.
(iii) Deliver to the Buyer an opinion letter from the
Company's counsel stating that (a) the Company is duly incorporated
and validly existing; (b) this Agreement, the issuance of the
Preferred Shares, and the issuance of the Common Stock upon conversion
of the Preferred Shares up to the number of shares of common stock
authorized in the Company's Certificate of Incorporation, have been
duly approved by all required corporate action, and that all such
securities upon due issuance, shall be validly issued and outstanding,
fully paid and nonassessable, and in each case, having the rights,
preferences and privileges set forth in the Certificate of
Incorporation; and (c) this Agreement is a valid and binding
obligation of the Company, enforceable in accordance with its terms,
except as enforceability of any indemnification provisions may be
limited by principles of public policy, and subject to laws of general
application relating to bankruptcy, insolvency and the relief of
debtors and rules of laws governing specific performance and other
equitable remedies; and
(iv) Deliver to the Buyer a signed Subscription Agreement
which shall be signed after execution of such Subscription Agreement
by Buyer; and
(v) Deliver to the Buyer executed warrants to purchase
common stock
6
<PAGE>
of the Company in the form attached hereto as Exhibit D (the
"Warrants").
7
<PAGE>
3.5 Upon confirmation by Buyer that it has received each of the items set
forth in 3.4(i)-(v), and by the Company that it has received a signed
Subscription Agreement, Escrow Agent shall, after deducting any amounts due to
it from the Company, release the balance of the purchase price to the Company or
as directed by the Company.
E. Pacific Continental Securities Corporation shall serve as agent (the
"Agent") in the transaction contemplated by this Agreement. Agent's fee is
solely the responsibility of the Company and Company expressly agrees to
pay Agent said fee as such is agreed upon between the Company and the
Agent. Neither the Company nor the Agent has any recourse of any kind
whatsoever against the Buyer for any monies owed the Agent by the Company
or for any monies paid by the Company to the Agent. Company expressly
indemnifies Buyer against any monies owed the Agent.
4. REGISTRATION OF CONVERSION SHARES
4.1 The Company shall prepare and file with the SEC a registration
statement as soon as practical, which registration statement shall include the
Conversion Shares and shares of Common Stock issuable pursuant to the Warrants
("Warrant Shares") and shall thereafter use its best efforts to have such
registration statement declared effective within 90 days after the Closing Date
(the "Target Date") and remain effective until the earlier of the date on which
all the Conversion Shares are sold or two years after the Closing Date (the
"Effective Period"). The Company shall prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective throughout the Effective Period and to comply with the
provisions of the Securities Act with respect to the sale or other disposition
of the Conversion Shares or Warrant Shares covered by such registration
statement whenever the Buyer shall desire to sell or otherwise dispose of the
same.
4.2 If a registration statement covering all Shares is not effective by
the Target Date, the Company shall pay to the Buyers as liquidated damages an
aggregate amount equal to one percent ( 1%) of the total purchase price of the
Preferred Stock for each thirty (30) day period following the Target Date until
such time as the registration statement is declared effective. The payment set
forth above shall be pro-rated daily as to any period of less than thirty (30)
days. Such payment shall be made to each Buyer by cashier's check or wire
transfer in immediately available funds to such account as shall be designated
in writing by the Buyer and shall be paid irrespective of the amount of
Preferred Stock, Conversion Shares and Warrant Shares held by Buyer on the
Target Date and thereafter.
4.3 Any amount payable pursuant to the foregoing provisions shall be
delivered on or before the fifth (5th) day following the end of the calendar
month in which such payment or delivery obligation arose.
4.4 The Company shall file a request for acceleration of effectiveness of
the registration statement within five days after it has received a no review/no
further comment determination from the SEC.
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4.5 It shall be a condition precedent to the obligation of the Company to
register any Conversion Shares and Warrant Shares pursuant to this Section 4
that Buyer shall furnish to the Company such information regarding the
Conversion Shares and Warrant Shares held and the intended method of disposition
thereof and other information concerning the Buyer as the Company shall
reasonably request and as shall be required in connection with the registration
statement to be filed by the Company. If after a registration statement becomes
effective the Company advises the Buyer that the Company considers it
appropriate to amend or supplement the applicable registration statement, the
Buyer shall suspend further sales of the Conversion Shares and Warrant Shares
until the Company advises the Buyer that such registration statement has been
amended or supplemented.
4.6 Whenever the Company is required by the provisions of this Section 4
to effect the registration of the Conversion Shares and Warrant Shares under the
Securities Act, the Company shall:
(i) Prepare and file with the SEC a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective;
(ii) Prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus contained
therein as may be necessary to keep such registration statement
effective;
(iii) Furnish to the Buyer and to the underwriters (if any)
of the securities being registered such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus
and such other documents as the Buyer may reasonably request in order
to facilitate the public offering of such securities;
(iv) Use its best efforts to register or qualify the
securities covered by such registration statement under such state
securities or Blue Sky Laws of such jurisdictions as the Buyer may
reasonably request within twenty (20) days following the original
filing of such registration statement, except that the Company shall
not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(v) Notify the Buyer, promptly after it shall receive
notice thereof, of the time when such registration statement has
become effective or a supplement to any prospectus forming a part of
such registration statement has been filed;
(vi) Notify the Buyer promptly of any request by the SEC for
the amending or supplementing of such registration statement or
prospectus or for additional information; and
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(vii) Prepare and promptly file with the SEC and promptly
notify the Buyer of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct
any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities
Act, any event shall have occurred as the result of which any such
prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
4.7 With respect to the inclusion of the Conversion Shares and Warrant
Shares in a registration statement pursuant to this Section 4, all registration
expenses, fees, costs and expenses of and incidental to such registration,
inclusion and public offering in connection therewith shall be borne by the
Company; provided, however, that the Buyer shall bear its own professional fees
and pro rata share of the underwriting discount and commissions, if any. The
fees, costs and expenses of registration to be borne by the Company shall
include, without limitation, all registration, filing, printing expenses, fees
and disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such securities
(if any and if the Company and/or selling security holders are required to bear
such fees and disbursements), and all legal fees and disbursements and other
expenses of complying with state securities or Blue Sky Laws of any jurisdiction
in which the securities to be offered are to be registered or qualified.
4.8 Subject to the conditions set forth below, in connection with any
registration of the Shares pursuant to this Section 4, the Company agrees to
indemnify and hold harmless the Buyer, any underwriter for the Company or acting
on behalf of the Buyer and each person, if any, who controls the Buyer, within
the meaning of Section 15 of the Securities Act, as follows:
(i) Against any and all loss, claim, damage and expense
whatsoever arising out of or based upon (including, but not limited
to, any and all expense whatsoever reasonably incurred in
investigating, preparing or defending any litigation, commenced or
threatened, or any claim whatsoever based upon) any untrue or alleged
untrue statement of a material fact contained in any preliminary
prospectus (if used prior to the effective date of the registration
statement), the registration statement or the prospectus (as from time
to time amended and supplemented), or in any application or other
document executed by the Company or based upon written information
furnished by the Company filed in any jurisdiction in order to qualify
the Company's securities under the securities laws thereof, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading, or any other violation of applicable federal or state
statutory or regulatory requirements or limitations relating to action
or inaction by the Company in the course of preparing, filing, or
implementing such registered offering; provided, however, that the
indemnity agreement contained in this section shall not apply to
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any loss, claim, damage, liability or action arising out of or based
upon any untrue or alleged untrue statement or omission made in
reliance upon and in conformity with any information furnished in
writing to the Company by or on behalf of the Buyer expressly for use
in connection therewith or arising out of any action or inaction of
the Buyer;
(ii) Subject to the proviso contained in Subsection (i)
above, against any and all loss, liability, claim, damage and expense
whatsoever to the extent of the aggregate amount paid in settlement of
any litigation, commenced or threatened, or of any claim whatsoever
based upon any untrue statement or omission (including, but not
limited to, any and all expense whatsoever reasonably incurred in
investigating, preparing or defending against any such litigation or
claim) if such settlement is effected with the written consent of the
Company; and
(iii) In no case shall the Company be liable under this
indemnity agreement with respect to any claim made against such
Company, underwriter or any such controlling person unless the Company
shall be notified, by letter or by facsimile confirmed by letter, of
any action commenced against such persons, promptly after such person
shall have been served with the summons or other legal process giving
information as to the nature and basis of the claim. The failure to
so notify the Company, if prejudicial in any material respect to the
Company's ability to defend such claim, shall relieve the Company from
its liability to the indemnified person under this Section 4, but only
to the extent that the Company was prejudiced. The failure to so
notify the Company shall not relieve the Company from any liability
which it may have otherwise than on account of this indemnity
agreement. The Company shall be entitled to participate at its own
expense in the defense of any suit brought to enforce any such claim,
but if the Company elects to assume the defense, such defense shall be
conducted by counsel chosen by it, provided such counsel is reasonably
satisfactory to the Company or controlling persons, defendants in any
suit so brought. In the event the Company elects to assume the
defense of any such suit and retain such counsel, the Company,
underwriter or controlling persons, defendants in the suit, shall,
after the date they are notified of such election, bear the fees and
expenses of any counsel thereafter retained by them, as well as any
other expenses thereafter incurred by them in connection with the
defense thereof; provided, however, that if the Company, underwriter
or controlling persons reasonably believe that there may be available
to them any defense or counterclaim different than those available to
the Company or that representation of such Company, underwriters or
controlling persons by counsel for the Company presents a conflict of
interest for such counsel, then such Company, underwriter and
controlling person shall be entitled to defend such suit with counsel
of their own choosing and the Company shall bear the fees, expenses
and other costs of such separate counsel.
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4.9 Each Buyer agrees to indemnify and hold harmless the Company, each
underwriter for the offering, (if any), and each of their officers and directors
and agents and each other person, if any, who controls the Company and
underwriter within the meaning of Section 15 of the Securities Act against any
and all such losses, liabilities, claims, damages and expenses as are
indemnified against by the Company under Section 4.6 above; provided, however,
that such indemnification by Buyer hereunder shall be limited to any losses,
liabilities, claims, damages, or expenses to the extent caused by any untrue
statement of a material fact or omission of a material fact (required to be
stated therein or necessary to make statements therein not misleading), if any
made (or in settlement of any litigation effected with the written consent of
such Company, alleged to have been made) in any preliminary prospectus, the
registration statement or prospectus or any amendment or supplement thereof or
in any application or other document in reliance upon, and in conformity with,
written information furnished in respect of such Company by or on behalf of such
Company expressly for use in any preliminary prospectus, the registration
statement or prospectus or any amendment or supplement thereof or in any such
application or other document or arising out of any action or inaction of such
Company in implementing such registered offering. Notwithstanding the
foregoing, the indemnification obligation of each Buyer shall not exceed the
purchase price of the Notes paid by such Buyer. In case any action shall be
brought against the Company, or any other person so indemnified, in respect of
which indemnity may be sought against any Company, such Company shall have the
rights and duties given to the Company, and each other person so indemnified
shall have the rights and duties given to the Buyer, by the provisions of
Section 4.6. The person indemnified agrees to notify the Company promptly after
the assertion of any claim against the person indemnified in connection with the
sale of securities.
4.10 If the indemnification provided for in Sections 4.8 and 4.9 above are
unavailable or insufficient to hold harmless an indemnified party in respect of
any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the indemnified party, on one hand,
and such indemnifying party, on the other hand, in connection with the
statements or omissions which resulted in such losses, claims, damages, or
liabilities (or actions in respect thereof). The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnified party, on one
hand, or such indemnifying party, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. No person who has committed fraudulent
misrepresentation (within the meaning of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof referred to above in this Section shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim.
5. CLOSING DATE
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The Preferred Share certificate shall be delivered to Buyer and the funds
therefore shall be delivered to Company on or before May 22, 1998 (the "Closing
Date") or at such other time mutually agreed to by the parties.
6. GOVERNING LAW; INTERPRETATION
This Agreement shall be governed by and interpreted in accordance with the
laws of the State of Delaware. Facsimile signatures of this Agreement shall be
binding on all parties hereto.
7. ENTIRE AGREEMENT; AMENDMENT
This Agreement and the other documents delivered pursuant hereto constitute
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof, and no party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth herein or therein. Except as expressly provided
herein, neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
8. NOTICES; ETC.
Any notice, demand or request required or permitted to be given by either
the Company or the Buyer pursuant to the terms of this Agreement shall be in
writing and shall be deemed given when delivered personally or by facsimile,
with a hard copy to follow by two day courier addressed to the parties at the
addresses of the parties set forth at the end of this Agreement or such other
address as a party may request by notifying the other in writing.
9. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
10. SEVERABILITY
In the event that any provision of this Agreement becomes or is declared by
a court of competent jurisdiction to be illegal, enforceable or void, this
Agreement shall continue in full force and effect without said provision,
provided that no such severability shall be effective if it materially changes
the economic benefit of this Agreement to any party.
11. TITLES AND SUBTITLES
The titles and subtitles used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this Agreement.
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IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above, as confirmed by signatory below. Facsimile signatures of this
agreement shall be binding on all parties hereto.
Official Signatory of Company:
MICROTEL INTERNATIONAL, INC.
4290 East Brickell Street
Ontario, California 91761
By:________________________________
Carmine T. Oliva
President and Chief Executive Officer
RANA GENERAL HOLDING, LTD.
By:________________________________
Number of Shares of
Series A Preferred: 50
<PAGE>
THE OFFER AND SALE OF THE SECURITIES REFERRED TO IN THIS AGREEMENT (THE
"OFFERING") HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND SUCH SHARES
ARE BEING OFFERED AND SOLD IN RELIANCE ON THE EXEMPTION FROM THE SECURITIES
REGISTRATION AND QUALIFICATION REQUIREMENTS OF THE ACT AND SUCH LAWS OFFERED
BY SECTION 4(2) OF THE ACT. ACCORDINGLY, THE SECURITIES MAY NOT BE
TRANSFERRED OR RESOLD WITHOUT REGISTRATION AND QUALIFICATION UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH
REGISTRATION AND QUALIFICATION UNDER THE ACT AND SUCH LAWS IS THEN AVAILABLE.
THE OFFER AND SALE OF THE SECURITIES EFFECTED HEREBY HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE
SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE
FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING.
SUBSCRIPTION AGREEMENT
MICROTEL INTERNATIONAL, INC.
CONVERTIBLE PREFERRED STOCK - SERIES A
_______________________________________________________________________________
THIS SUBSCRIPTION AGREEMENT (hereinafter the "Agreement") has been executed
by the undersigned (collectively the "Buyer") in connection with the sale of
certain Securities designated as Series A Convertible Preferred Stock
(hereinafter the "Preferred Shares"), which are convertible into shares of
common stock (hereinafter the "Conversion Shares") of MicroTel International,
Inc. (the "Company").
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE
1.1 Each Buyer hereby subscribes for the number of Preferred Shares set
forth below on the signature page of this Agreement which Preferred Shares
shall be convertible into Conversion Shares of the Company in accordance with
the terms set forth in the Certificate of Designations, Rights and
Preferences of Preferred Stock attached as Exhibit A to this Agreement (the
"Conversion Shares"), at a purchase price of $10,000 per Preferred Share
payable in United States Dollars.
1.2 Buyer shall pay the purchase price by delivering same day funds in
United States Dollars to the Company upon delivery of the Preferred Shares by
the Company to Buyer.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES.
2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants that as of the date of this Agreement:
(a) EXISTENCE. The Company is a corporation duly organized and in
good standing under the laws of the State of Delaware and is duly qualified
to do business and is in good standing in all states where such
qualification is necessary, except for those jurisdictions in which the
failure to qualify would not, in the aggregate, have a material adverse
effect on the Company's financial condition, results of operations or
business.
(b) AUTHORITY. The execution and delivery by the Company of this
Agreement and the Preferred Stock (i) are within the Company's corporate
powers; (ii) are duly authorized by the Company's board of directors; (iii)
are not in contravention of the terms of the Company's certificate of
incorporation or bylaws; (iv) are not in contravention of any law or laws;
(v) except for the filing of a Form D Notice with the Securities and
Exchange Commission and any exemption filing related thereto which may be
required pursuant to applicable state securities or "blue sky" laws, do not
require any governmental consent, registration or approval; (vi) do not
contravene any contractual or governmental restriction binding upon the
Company; and (vii) will not result in the imposition of any lien, charge,
security interest or encumbrance upon any property of the Company under any
existing indenture, mortgage, deed of trust, loan or credit agreement or
other material agreement or instrument to which the Company is a party or
by which the Company or any of the Company's property may be bound or
affected.
(c) BINDING EFFECT. This Agreement has been duly authorized,
executed and delivered by the Company and constitutes the valid and legally
binding obligation of the Company, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
(d) CAPITALIZATION. The authorized capital stock of the Company
consists of 25,000,000 shares of Common Stock, par value $.0033 per share,
11,927,793 shares of which are issued and outstanding and 10,000,000 shares
of Preferred Stock, par value $.01 per share, of which none are
outstanding. The shares of common stock issuable upon conversion of the
Preferred Stock (the "Conversion Shares") have been duly and validly
authorized and reserved for issuance and, when issued and delivered in
accordance with the terms of this Agreement, will be duly and validly
issued, fully paid and non-assessable.
(e) SEC DOCUMENTS. The Company has furnished each Buyer with a true
and complete copy of the Company's Report on Form 10-K for the fiscal year
ended December 31, 1997 and Form 10-Q for the quarter ended March 31, 1998
(the "Disclosure Documents"). Except as disclosed in the Disclosure
Documents, since December 31, 1997 the Company has not incurred any
material liability except in the
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ordinary course of its business consistent with past practice and there
has not been any change in the business, financial condition or results of
operations of the Company which has had a material adverse effect on the
Company. Since January 1, 1997, the Company has filed with the Securities
and Exchange Commission (the "SEC") all documents required to be filed
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder. As of their
respective dates, the Disclosure Documents complied in all material
respects with the requirements of the Exchange Act, and the rules and
regulations of the SEC thereunder applicable to such Disclosure Documents,
and the Disclosure Documents did not contain any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Disclosure Documents (the
"Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto. The Financial Statements
are accurate, complete and have been prepared in accordance with the
books and records of the Company and in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto and fairly
present (subject, in the case of the unaudited statements, to normal,
recurring audit adjustments that are not material) the consolidated
financial position of the Company as at the dates thereof and the
consolidated results of its operations and cash flows for the periods
then ended.
(f) For a period of ninety (90) days commencing with the Effective
Date of the Registration Statement, the Company covenants that it shall not
issue any issued additional common stock or securities convertible into
common stock or preferred stock unless such securities are issued at the
then current Market Price. If the Company desires to issue securities
during such ninety (90) day period at less than current Market Price, then:
(a) the Buyer's conversion discount will be adjusted to equal
the conversion discount given to the Buyer of such additional
securities; and
(b) the restrictions contained in Section 2.2(c) hereof shall be
lifted upon the issuance of such additional securities.
For purposes of this Section(e), the Market Price means the average
closing sale price for the ten trading days immediately preceding the date of
issuance.
Notwithstanding the above, the Company shall not be precluded from
issuing (i) Common Stock issued pursuant to Rule 144, provided the holder
thereof holds such Common Stock for at least one year from the date of issuance;
or (ii) the issuance of securities (other than for cash) in connection with a
merger, consolidation, sale of assets, disposition or the exchange of the
capital stock for assets, stock or other joint venture interests; provided, such
securities would not be included in the Registration Statement relating to the
Shares and a registration
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statement in respect of such stock shall not be filed prior to sixty (60)
days after the Effective Date of the Registration Statement.
(g) LITIGATION. Except as set forth in the Disclosure Documents,
there is neither pending nor, to the Company's knowledge and belief,
threatened any action, suit, proceeding or claim, or any basis therefor, to
which the Company is or may be named as a party or its property is or may
be subject or which calls into question any of the transactions
contemplated by this Agreement.
(h) SECURITIES MATTERS. Subject to the accuracy of the
representations of the Buyers set forth in Section 2.2 hereof, the offer,
sale and issuance of the Preferred Stock and the Conversion Shares as
contemplated by this Agreement are exempt from the registration
requirements of the Securities Act of 1933 as amended (the "Securities
Act"). The Company has complied and will comply with all applicable state
"blue sky" or securities laws in connection with the offer, sale and
issuance of the Preferred Stock and the Conversion Shares as contemplated
by this Agreement.
(i) CERTIFICATES. The Company will issue one or more Certificates
representing the Preferred Shares in the name of Buyer with the following
restrictive legend set forth below (the "Restrictive Legend") in such
denominations to be specified by the Buyer:
"The Securities represented by this Certificate have not
been registered under the United States Securities Act of
1933 (the "Act") and may not be sold, transferred, pledged
or otherwise hypothecated unless (a) they are covered by a
registration statement or a post-effective amendment thereto
under the Act, or (b) in the opinion of counsel for Buyer,
which opinion shall be reasonably acceptable to the Company,
such sale, transfer, pledge or hypothecation is otherwise
exempt from the provisions of Section 5 of the Act."
(j) CONVERSION. Within two full business days of receipt by the
Company of a properly executed request for conversion in the form annexed
as Exhibit B hereto accompanied by the Preferred Shares to be converted,
the Company will deliver to its transfer agent its directive and
authorization to execute the conversion and to issue to Buyer the common
stock shares so authorized.
The Company acknowledges that a delay in issuance of its authorization
and directive for the conversion could result in economic loss to the
Buyer. Therefore, as compensation to the Buyer for such loss, in the event
that the Company fails to deliver said authorization and directive within
two full business days, the Company agrees to pay liquidated damages to the
Buyer for late issuance of said authorization and directive in the amount
of $500 per day for each day of delay after three days. Nothing herein
shall create a liability to the Company for actions or delays of the
transfer agent once the authorization and directive have been delivered to
it by the Company. Any liquidated
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<PAGE>
damages due Buyer will be paid within five (5) days of demand therefore.
(k) ISSUANCE OF SHARES. Upon conversion of the Preferred Shares, the
Company will issue one or more certificates representing the Conversion
Shares in the name of the Buyer without restrictive legend, except as may
otherwise be required by applicable law, rule or regulation, and in DTC
eligible form, in such denominations to be specified by the Buyer prior to
conversion provided Buyer represents to the Company that resale of the
Conversion Shares will be made only in compliance with applicable
securities laws. Company further warrants that no instructions other than
these instructions, and instructions for a "stop transfer" for any sale of
Conversion Shares in excess of those permitted to be sold under Section
2.2(c), have been given to the transfer agent and also warrants that the
Conversion Shares shall otherwise be freely transferable on the books and
records of the Company subject to compliance with Federal and State
securities laws.
(l) The Company may be limited in the number of shares of Common
Stock it may issue by NASDAQ Rule 4310(c)(25)(H)(i)(a)(2) (the "Cap
Regulations"). The Company agrees that (i) the Company will take all steps
reasonably necessary to be in a position to issue shares of Common Stock on
conversion of the Preferred Stock and/or exercise of the Warrants without
violating the Cap Regulations and (ii) if, despite taking such steps, the
Company still cannot issue such shares of Common Stock without violating
the Cap Regulations, the Buyer, to the extent it holds Preferred Stock and
Warrants which cannot be converted as a result of the Cap Regulations (each
such share, an "Unconverted Preferred Stock") shall have the option,
exercisable in Buyer's sole and absolute discretion, to elect either of the
following remedies:
(x) require the Company to issue shares of Common Stock in
accordance with Buyer's notice of conversion at a conversion purchase
price equal to the average of the closing bid price per share of
Common Stock for the five (5) consecutive trading days (subject to
certain equitable adjustments for certain events occurring during such
period) preceding the date of notice of conversion; or
(y) require the Company to redeem each Unconverted Preferred
Stock for an amount in cash (the "Redemption Amount") equal to:
V x M
C
"V" means the stated value of the Unconverted Preferred Stock
plus any accrued but unpaid interest thereof;
"C" means the conversion price in effect on the date of
redemption (the "Redemption Date") specified in the notice from the
Buyer; and
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"M" means the highest closing bid price per share of the Common
Stock during the period beginning on the Redemption Date and ending on
the date of payment of the Redemption Amount.
2.2 REPRESENTATIONS AND WARRANTIES OF THE BUYER. Each Buyer
represents and warrants that as of the date of the execution of this
Agreement:
(a) AUTHORIZATION. This Agreement constitutes a valid and legally
binding obligation of such Buyer.
(b) INVESTMENT REPRESENTATIONS. Except as provided in the
registration provisions hereof:
(i) The Buyer has received and reviewed the Company's
Disclosure Documents and the Buyer or the Buyer's designated
representatives have concluded a satisfactory due diligence
investigation of the Company and have had an opportunity to have all
their questions regarding the Company satisfactorily answered.
(ii) The Buyer acknowledges that the Preferred Stock and the
Conversion Shares are speculative and involve a high degree of risk
and the Buyer represents that it is able to sustain the loss of the
entire amount of its investment.
(iii) The Buyer (or its members and/or officers) has
previously invested in unregistered securities and has sufficient
financial and investing expertise to evaluate and understand the risks
of the Preferred Stock and the Conversion Shares.
(iv) The Buyer has received from the Company, and is relying
on, no representations (except as set forth in this Agreement) or
projections with respect to the Company's business and prospects.
(v) The Buyer is an "accredited investor" within the
meaning of Regulation D under the Securities Act.
(vi) The Buyer is acquiring the Preferred Stock and the
Conversion Shares for investment purposes only without intent to
distribute the same, and acknowledges that the Preferred Stock and the
Conversion Shares have not been registered under the Securities Act
and applicable state securities laws, and accordingly, constitute
"restricted securities" for purposes of the Securities Act and such
state securities laws.
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(vii) The Buyer acknowledges that it will not be able to
transfer the Preferred Stock and the Conversion Shares except upon
compliance with the registration requirements of the Securities Act
and applicable state securities laws or exemptions therefrom.
(viii) The certificates and/or instruments evidencing the
Preferred Stock and the Conversion Shares will contain a legend to the
foregoing effect.
(c) LOCK-UP. The Buyer will not transfer any Preferred Shares or
Conversion Shares until the earlier of (i) ninety (90) days after the date
of the Closing or (ii) the Effective Date of the Registration Statement to
be filed pursuant to Section 4 hereof (the earlier of (i) or (ii), the
"Conversion Start Date"). No more than 20% of the aggregate number of
Series A Preferred Shares originally purchased and owned by the Buyer may
be converted in any thirty (30) day period, on a cumulative basis, after
the Conversion Start Date. Further, the Buyer will not, after conversion,
sell more than 20% of the Conversion Shares owned by it in any thirty day
period, on a cumulative basis, commencing with the Conversion Start Date.
3. CLOSING
3.1 The Buyer understands that the Company's obligation to sell the
Preferred Shares is conditioned upon delivery by the Buyer to the Company of
the purchase price set forth in Section 1 herein.
3.2 The Company understands that Buyer's obligation to purchase the
Preferred Shares is conditioned upon delivery of certificate(s) representing
the Preferred Shares as described herein, and provision of an opinion of
counsel as provided in Subsection D (ii) herein below.
3.3 For this transaction to close, the Buyer must:
(i) Wire funds to the Pacific Continental Securities
Corporation, as Escrow Agent (the "Escrow Agent"), in the amount of
One Million U.S. dollars ($1,000,000) (the "Purchase Price") no later
than 72 hours after receipt by the Company of the Subscription
Agreement executed by the Buyer and the Company. Wire transfer
instructions for the Escrow Agent are annexed as Exhibit C hereto.
(ii) Deliver a signed Subscription Agreement.
3.4 For this transaction to close, the Company must:
(i) Deliver to the Buyer Certificate(s) for the Preferred
Shares.
(ii) Deliver to the Buyer the Company's Certificate of
Designation set
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forth in Exhibit A hereto.
(iii) Deliver to the Buyer an opinion letter from the
Company's counsel in substantially the form annexed as Exhibit
3.4(iii) hereto; and
(iv) Deliver to the Buyer a signed Subscription Agreement
which shall be signed after execution of such Subscription Agreement
by Buyer; and
(v) Deliver to the Buyer executed warrants to purchase
common stock of the Company in the form attached hereto as Exhibit D
(the "Warrants").
3.5 Upon confirmation by Buyer that it has received each of the items
set forth in 3.4(i)-(v), and by the Company that it has received a signed
Subscription Agreement, Escrow Agent shall, after deducting any amounts due
to it from the Company, release the balance of the purchase price to the
Company or as directed by the Company.
E. Pacific Continental Securities Corporation shall serve as agent (the
"Agent") in the transaction contemplated by this Agreement. Agent's fee is
solely the responsibility of the Company and Company expressly agrees to
pay Agent said fee as such is agreed upon between the Company and the
Agent. Neither the Company nor the Agent has any recourse of any kind
whatsoever against the Buyer for any monies owed the Agent by the Company
or for any monies paid by the Company to the Agent. Company expressly
indemnifies Buyer against any monies owed the Agent.
4. REGISTRATION OF CONVERSION SHARES
4.1 The Company shall prepare and file with the SEC a registration
statement as soon as practical, which registration statement shall include
the Conversion Shares and shares of Common Stock issuable pursuant to the
Warrants ("Warrant Shares") and shall thereafter use its best efforts to have
such registration statement declared effective the earlier of (i) five (5)
days after the SEC indicates the Registration Statement may be declared
effective or (ii) ninety (90) days after the Closing Date (the "Target Date")
and remain effective until the earlier of the date on which all the
Conversion Shares are sold or two years after the Closing Date (the
"Effective Period"). The Company shall prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective throughout the Effective Period and to comply with the
provisions of the Securities Act with respect to the sale or other
disposition of the Conversion Shares or Warrant Shares covered by such
registration statement whenever the Buyer shall desire to sell or otherwise
dispose of the same.
4.2 If a registration statement covering all Shares is not effective by
the Target Date, the Company shall pay to the Buyers as liquidated damages an
aggregate amount equal to one percent (1%) of the total purchase price of the
Preferred Stock for each thirty (30) day period following the Target Date
until such time as the registration statement is declared effective. The
payment set forth above shall be pro-rated daily as to any period of less
than thirty (30) days. Such payment shall be made to each Buyer by cashier's
check or wire transfer in immediately
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available funds to such account as shall be designated in writing by the
Buyer and shall be paid irrespective of the amount of Preferred Stock,
Conversion Shares and Warrant Shares held by Buyer on the Target Date and
thereafter. After the expiration of the first thirty (30) day period, the
Company shall pay to the Buyer as liquidated damages 2% of the total purchase
price of the Preferred Stock for each additional thirty (30) day period until
such time as the Registration Statement is declared effective, which shall be
pro-rated daily for any period of less than thirty (30) days.
4.3 Any amount payable pursuant to the foregoing provisions shall be
delivered on or before the fifth (5th) day following the end of the calendar
month in which such payment or delivery obligation arose.
4.4 The Company shall file a request for acceleration of effectiveness
of the registration statement within five days after it has received a no
review/no further comment determination from the SEC.
4.5 The Registration Statement shall include only the common stock to
be issued to the Buyer and other purchasers of the Preferred Shares (except
such Registration Statement may include additional shares of common stock not
to exceed 100,000 in the aggregate).
4.6 It shall be a condition precedent to the obligation of the Company
to register any Conversion Shares and Warrant Shares pursuant to this Section
4 that Buyer shall furnish to the Company such information regarding the
Conversion Shares and Warrant Shares held and the intended method of
disposition thereof and other information concerning the Buyer as the Company
shall reasonably request and as shall be required in connection with the
registration statement to be filed by the Company. If after a registration
statement becomes effective the Company advises the Buyer that the Company
considers it appropriate to amend or supplement the applicable registration
statement, the Buyer shall suspend further sales of the Conversion Shares and
Warrant Shares until the Company advises the Buyer that such registration
statement has been amended or supplemented.
4.7 Whenever the Company is required by the provisions of this Section
4 to effect the registration of the Conversion Shares and Warrant Shares
under the Securities Act, the Company shall:
(i) Prepare and file with the SEC a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective;
(ii) Prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus contained
therein as may be necessary to keep such registration statement
effective;
(iii) Furnish to the Buyer and to the underwriters (if any)
of the securities being registered such reasonable number of copies of
the registration
9
<PAGE>
statement, preliminary prospectus, final prospectus and such other
documents as the Buyer may reasonably request in order to facilitate
the public offering of such securities;
(iv) Use its best efforts to register or qualify the
securities covered by such registration statement under such state
securities or Blue Sky Laws of such jurisdictions as the Buyer may
reasonably request within twenty (20) days following the original
filing of such registration statement, except that the Company shall
not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(v) Notify the Buyer, promptly after it shall receive
notice thereof, of the time when such registration statement has
become effective or a supplement to any prospectus forming a part of
such registration statement has been filed;
(vi) Notify the Buyer promptly of any request by the SEC for
the amending or supplementing of such registration statement or
prospectus or for additional information; and
(vii) Prepare and promptly file with the SEC and promptly
notify the Buyer of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct
any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities
Act, any event shall have occurred as the result of which any such
prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
4.8 With respect to the inclusion of the Conversion Shares and Warrant
Shares in a registration statement pursuant to this Section 4, all
registration expenses, fees, costs and expenses of and incidental to such
registration, inclusion and public offering in connection therewith shall be
borne by the Company; provided, however, that the Buyer shall bear its own
professional fees and pro rata share of the underwriting discount and
commissions, if any. The fees, costs and expenses of registration to be
borne by the Company shall include, without limitation, all registration,
filing, printing expenses, fees and disbursements of counsel and accountants
for the Company, fees and disbursements of counsel for the underwriter or
underwriters of such securities (if any and if the Company and/or selling
security holders are required to bear such fees and disbursements), and all
legal fees and disbursements and other expenses of complying with state
securities or Blue Sky Laws of any jurisdiction in which the securities to be
offered are to be registered or qualified.
4.9 Subject to the conditions set forth below, in connection with any
registration of the Shares pursuant to this Section 4, the Company agrees to
indemnify and hold harmless the Buyer, any underwriter for the Company or
acting on behalf of the Buyer and each person, if any,
10
<PAGE>
who controls the Buyer, within the meaning of Section 15 of the Securities
Act, as follows:
11
<PAGE>
(i) Against any and all loss, claim, damage and expense
whatsoever arising out of or based upon (including, but not limited
to, any and all expense whatsoever reasonably incurred in
investigating, preparing or defending any litigation, commenced or
threatened, or any claim whatsoever based upon) any untrue or alleged
untrue statement of a material fact contained in any preliminary
prospectus (if used prior to the effective date of the registration
statement), the registration statement or the prospectus (as from time
to time amended and supplemented), or in any application or other
document executed by the Company or based upon written information
furnished by the Company filed in any jurisdiction in order to qualify
the Company's securities under the securities laws thereof, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading, or any other violation of applicable federal or state
statutory or regulatory requirements or limitations relating to action
or inaction by the Company in the course of preparing, filing, or
implementing such registered offering; provided, however, that the
indemnity agreement contained in this section shall not apply to any
loss, claim, damage, liability or action arising out of or based upon
any untrue or alleged untrue statement or omission made in reliance
upon and in conformity with any information furnished in writing to
the Company by or on behalf of the Buyer expressly for use in
connection therewith or arising out of any action or inaction of the
Buyer;
(ii) Subject to the proviso contained in Subsection (i)
above, against any and all loss, liability, claim, damage and expense
whatsoever to the extent of the aggregate amount paid in settlement of
any litigation, commenced or threatened, or of any claim whatsoever
based upon any untrue statement or omission (including, but not
limited to, any and all expense whatsoever reasonably incurred in
investigating, preparing or defending against any such litigation or
claim) if such settlement is effected with the written consent of the
Company; and
(iii) In no case shall the Company be liable under this
indemnity agreement with respect to any claim made against such
Company, underwriter or any such controlling person unless the Company
shall be notified, by letter or by facsimile confirmed by letter, of
any action commenced against such persons, promptly after such person
shall have been served with the summons or other legal process giving
information as to the nature and basis of the claim. The failure to
so notify the Company, if prejudicial in any material respect to the
Company's ability to defend such claim, shall relieve the Company from
its liability to the indemnified person under this Section 4, but only
to the extent that the Company was prejudiced. The failure to so
notify the Company shall not relieve the Company from any liability
which it may have otherwise than on account of this indemnity
agreement. The Company shall be entitled to participate at its own
expense in the defense of any suit brought to enforce any such claim,
but if the Company elects to assume the defense, such defense shall be
12
<PAGE>
conducted by counsel chosen by it, provided such counsel is reasonably
satisfactory to the Company or controlling persons, defendants in any
suit so brought. In the event the Company elects to assume the
defense of any such suit and retain such counsel, the Company,
underwriter or controlling persons, defendants in the suit, shall,
after the date they are notified of such election, bear the fees and
expenses of any counsel thereafter retained by them, as well as any
other expenses thereafter incurred by them in connection with the
defense thereof; provided, however, that if the Company, underwriter
or controlling persons reasonably believe that there may be available
to them any defense or counterclaim different than those available to
the Company or that representation of such Company, underwriters or
controlling persons by counsel for the Company presents a conflict of
interest for such counsel, then such Company, underwriter and
controlling person shall be entitled to defend such suit with counsel
of their own choosing and the Company shall bear the fees, expenses
and other costs of such separate counsel.
4.10 Each Buyer agrees to indemnify and hold harmless the Company, each
underwriter for the offering, (if any), and each of their officers and
directors and agents and each other person, if any, who controls the Company
and underwriter within the meaning of Section 15 of the Securities Act
against any and all such losses, liabilities, claims, damages and expenses as
are indemnified against by the Company under Section 4.6 above; provided,
however, that such indemnification by Buyer hereunder shall be limited to any
losses, liabilities, claims, damages, or expenses to the extent caused by any
untrue statement of a material fact or omission of a material fact (required
to be stated therein or necessary to make statements therein not misleading),
if any made (or in settlement of any litigation effected with the written
consent of such Company, alleged to have been made) in any preliminary
prospectus, the registration statement or prospectus or any amendment or
supplement thereof or in any application or other document in reliance upon,
and in conformity with, written information furnished in respect of such
Company by or on behalf of such Company expressly for use in any preliminary
prospectus, the registration statement or prospectus or any amendment or
supplement thereof or in any such application or other document or arising
out of any action or inaction of such Company in implementing such registered
offering. Notwithstanding the foregoing, the indemnification obligation of
each Buyer shall not exceed the purchase price of the Notes paid by such
Buyer. In case any action shall be brought against the Company, or any other
person so indemnified, in respect of which indemnity may be sought against
any Company, such Company shall have the rights and duties given to the
Company, and each other person so indemnified shall have the rights and
duties given to the Buyer, by the provisions of Section 4.6. The person
indemnified agrees to notify the Company promptly after the assertion of any
claim against the person indemnified in connection with the sale of
securities.
4.11 If the indemnification provided for in Sections 4.8 and 4.9 above
are unavailable or insufficient to hold harmless an indemnified party in
respect of any losses, claims, damages or liabilities (or actions in respect
thereof) referred to therein, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses,
13
<PAGE>
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnified
party, on one hand, and such indemnifying party, on the other hand, in
connection with the statements or omissions which resulted in such losses,
claims, damages, or liabilities (or actions in respect thereof). The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnified party, on one hand, or such indemnifying party,
on the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
No person who has committed fraudulent misrepresentation (within the meaning
of the Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof referred to above in this Section
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim.
5. CLOSING DATE
The Preferred Share certificate shall be delivered to Buyer and the
funds therefore shall be delivered to Company on or before June 12, 1998 (the
"Closing Date") or at such other time mutually agreed to by the parties.
6. GOVERNING LAW; INTERPRETATION
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Delaware. The Company and the Buyer hereby
irrevocably consent to the exclusive jurisdiction and venue of the state and
federal courts of the State of Delaware and agree that any action or
proceeding arising out of or relating to this Agreement shall be brought in
the state or federal courts located in Delaware. The Company and the Buyer
waive any defense of forum nonconveniens and any other objections or defenses
which the Buyer or Company may have to venue in connection with any such
action or proceeding. The Company and the Buyer hereby waive any right to
trial by jury in such proceeding.
7. ENTIRE AGREEMENT; AMENDMENT
This Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof, and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or
therein. Except as expressly provided herein, neither this Agreement nor any
term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought.
8. NOTICES; ETC.
Any notice, demand or request required or permitted to be given by
either the Company
14
<PAGE>
or the Buyer pursuant to the terms of this Agreement shall be in writing and
shall be deemed given when delivered personally or by facsimile, with a hard
copy to follow by two day courier addressed to the parties at the addresses
of the parties set forth at the end of this Agreement or such other address
as a party may request by notifying the other in writing.
9. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
10. SEVERABILITY
In the event that any provision of this Agreement becomes or is declared
by a court of competent jurisdiction to be illegal, enforceable or void, this
Agreement shall continue in full force and effect without said provision,
provided that no such severability shall be effective if it materially
changes the economic benefit of this Agreement to any party.
11. TITLES AND SUBTITLES
The titles and subtitles used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this
Agreement.
IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above, as confirmed by signatory below. Facsimile signatures of this
agreement shall be binding on all parties hereto.
Official Signatory of Company:
MICROTEL INTERNATIONAL, INC.
4290 East Brickell Street
Ontario, California 91761
By:
-----------------------------------
Carmine T. Oliva
President and Chief Executive Officer
RESONACE LTD.
By:
-----------------------------------
Number of Shares of
Series A Preferred: 100
15
<PAGE>
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING
WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE
EXERCISED OFFERED OR SOLD UNLESS, IN EACH CASE, THE WARRANTS AND WARRANT SHARES
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED, SOLD, PLEDGED,
HYPOTHECATED AND ENCUMBERED NOT EXCEPT PURSUANT TO THE PROVISIONS CONTAINED
HEREIN.
WARRANTS TO PURCHASE COMMON STOCK
MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company") hereby
grants to __________________________ (the "Holder") _________________________
(___________) transferable warrants (the "Warrants") for the purchase of common
stock of the Company (the "Common Stock"), with each whole Warrant entitling
the Holder to purchase one share of Common Stock (each a "Warrant Share" and
collectively the "Warrant Shares") on the terms and subject to the conditions
set forth herein.
1. TERM. The Warrants may be exercised, in whole or in part, at any time
and from time to time from the date hereof until 5:00 Pacific Time on May 22,
2001 (the "Exercise Period").
2. EXERCISE PRICE. The initial exercise price of each whole Warrant
shall be $1.25 per share (the "Exercise Price"). The Exercise Price shall be
subject to adjustment as provided in Section 9.
3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms
provided herein at any time during the Exercise Period by the surrender of
this certificate to the Company at its principal office together with the
Notice of Exercise annexed hereto duly completed and executed on behalf of
the Holder, accompanied by payment in full, in immediately available funds,
of the amount of the aggregate Exercise Price of the Warrant Shares being
purchased upon such exercise. The Holder shall be deemed the record owner of
such Warrant Shares as of and from the close of business on the date on which
this certificate is surrendered together with the completed Notice of
Exercise and payment in full as required above (the "Exercise Date"). The
Company agrees that the Warrant Shares so purchased shall be issued as soon
as practicable thereafter. It shall be a condition to the exercise of the
Warrants that the Holder or any transferee hereof provide an opinion of
counsel reasonably satisfactory to the Company that the Warrants and the
Warrant Shares to be delivered upon exercise thereof have been registered
under the Securities Act or that an exemption from the registration
requirements of the Securities Act is available.
<PAGE>
4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of
Common Stock upon exercise of the Warrants, the Company may pay the Holder a
cash amount determined by multiplying the fraction of a share otherwise
issuable by the Fair Market Value of one share of Common Stock. For this
purpose, "Fair Market Value" means the average closing sale price for the ten
trading days immediately preceding the Exercise Date or, if there is no
last-sale reporting for the Common Stock at such time, then the value as
determined in good faith by the Board of Directors of the Company.
5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not
have any rights as a stockholder of the Company with regard to the Warrant
Shares prior to the Exercise Date for any actual purchase of Warrant Shares.
6. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrants
Shares issuable upon the exercise of the Warrants have been registered under
the Securities Act or any state securities laws. The Holder acknowledges by
signing this certificate that, as of the date of this Warrant and at the time
of exercise that: (a) the Holder has acquired the Warrant or the Warrant
Shares, as the case may be, for the Holder's own account; (b) the Holder has
acquired the Warrants or the Warrant Shares, as the case may be, for
investment and not with a view to distribution; and (c) either the Holder has
a pre-existing personal or business relationship with the Company or its
executive officers, or by reason of the Holder's business or financial
experience the Holder has the capacity to protect the Holder's own interests
in connection with the transaction. The Holder agrees, by acceptance of this
certificate, that any Warrant Shares purchased upon exercise of the Warrants
may have to be held indefinitely, until registered and qualified for resale
pursuant to Section 7, or until an exemption from registration is available,
as evidenced by an opinion of counsel reasonably satisfactory to the Company.
The Holder, by acceptance of this certificate, consents to the placement of a
restrictive legend (the "Legend") on the certificates representing any
Warrant Shares that are purchased upon exercise of the Warrants during the
applicable restricted period under Rule 144 or any other applicable
restricted period under the Securities Act. The Legend shall be in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, UNLESS IN THE WRITTEN LEGAL OPINION (APPROVED BY THE COMPANY)
OF COUNSEL SATISFACTORY TO THE COMPANY, SUCH REGISTRATION IS NOT
REQUIRED.
<PAGE>
7. REGISTRATION RIGHTS. The shares of Common Stock underlying the
Warrants shall be accorded the same registration rights as the Conversion
Shares issuable pursuant to the Subscription Agreement for Series A
Convertible Preferred Stock executed by the Company and the Holder dated of
even date herewith.
8. RESERVATION OF SHARES. The Company agrees that, at all times
during the Exercise Period, the Company will have authorized and reserved,
for the exclusive purpose of issuance and delivery upon exercise of the
Warrants, a sufficient number of shares of its Common Stock to provide for
the issuance of the Warrant Shares.
9. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any
time during the Exercise Period shall, by subdivision, combination or
reclassification of securities, change any of the securities into which the
Warrants are exercisable into the same or a different number of securities of
any class or classes, the Warrants shall thereafter entitle the Holder to
acquire such number and kind of securities as would have been issuable as a
result of such change with respect to the Warrant Shares if the Warrant
Shares had been outstanding immediately prior to such subdivision,
combination, or reclassification. If shares of the Company's Common Stock
are subdivided into a greater number of shares of Common Stock, the Exercise
Price for the Warrant Shares upon exercise of the Warrants shall be
proportionately reduced and the number of Warrant Shares shall be
proportionately increased; and conversely, if shares of the Company's Common
Stock are combined into a smaller number of shares of Common Stock, the
Exercise Price shall be proportionately increased, and the number of Warrant
Shares shall be proportionately decreased.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of any certificate representing the Warrants
or the Warrant Shares (referred to herein as the "original certificate"), and
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to the Company, and upon reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation
of the original certificate if mutilated, the Company will make and deliver a
new certificate of like tenor in lieu of the original certificate.
11. ASSIGNMENT. The Warrants may be transferred subject to the
provisions of Section 6.
12. GENERAL. This certificate shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
between California residents entered into and to be performed entirely within
the State of California. The headings herein are for purposes of convenience
and reference only and shall not be used to construe or interpret the terms
of this certificate. The terms of this certificate may be amended, waived,
discharged or terminated only by a written instrument signed by both the
Company and the Holder. All notices and other communications from the
Company to the Holder shall be mailed by first-class registered or certified
mail, postage pre-paid, to the address furnished to the Company in writing by
the last Holder who shall have furnished an address to the Company in writing.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement on May
__ , 1998.
MICROTEL INTERNATIONAL, INC.
Dated:_____________ By:__________________________________
(Authorized Signature)
___________________________________
(Name and Title)
HOLDER
Dated:_____________ By:__________________________________
(Authorized Signature)
_________________________________
(Name and Title)
<PAGE>
NOTICE OF EXERCISE
To: MicroTel International, Inc. (the "Company")
1. The undersigned hereby elects to exercise a total of ___________
Warrants for the purchase of a like number of Warrant Shares, and tenders
herewith payment of the Exercise Price for such shares in full.
2. In exercising the Warrants, the undersigned hereby confirms and
acknowledges that: (a) the Warrant Shares are being acquired solely for the
account of the undersigned for investment and not with a view to or for sale
in connection with any distribution; (b) the undersigned has a pre-existing
personal or business relationship with the Company or its executive officers,
or by reason of the undersigned's business or financial experience the
undersigned has the capacity to protect the undersigned's own interests in
connection with the exercise of the Warrants; and (c) the undersigned will
not offer, sell or otherwise dispose of any of the Warrant Shares unless the
Warrant Shares have been registered under the Securities Act or an exemption
from such registration is available, as evidenced by an opinion of counsel
reasonably satisfactory to the Company.
3. The undersigned hereby certifies that the undersigned has
delivered to the Company an opinion of counsel to the effect that the
Warrants and the Warrant Shares have been registered under the Securities Act
or an exemption from such registration is available.
4. Please issue a certificate representing the Warrant Shares in the
name of the Holder and deliver the certificate to the address set forth below.
5. Please issue a new certificate representing the unexercised
portion (if any) of the Warrants in the name of the Holder and deliver the
certificate to the address set forth below.
Dated: _____________ _________________________________
(Name)
_________________________________
(Authorized Signature)
Address for Delivery:
_________________________________
_________________________________
_________________________________
_________________________________
<PAGE>
AMENDED CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF PREFERRED STOCK
OF MICROTEL INTERNATIONAL INC.,
A DELAWARE CORPORATION
The undersigned, Carmine T. Oliva, hereby certifies that:
A. He is the duly elected and acting President of MicroTel
International Inc., a Delaware corporation (the "Corporation").
B. Pursuant to authority given by the corporation's Certificate of
Incorporation, and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, the Board of Directors of
the Corporation seeks to provide the Shareholders of misstatements has duly
adopted the following amended and restated recitals and resolutions:
WHEREAS, the Certificate of Incorporation of this corporation provides
for two classes of shares known as Common Stock and Preferred Stock;
WHEREAS, on May 19, 1998, the Board of Directors adopted a Certificate
of Designations, Preferences and Rights of Series A Preferred Stock of
MicroTel International Inc. (the "Certificate of Designation"), which was
filed with the Secretary of State of the State of Delaware on May 20, 1998;
and
WHEREAS, certain purchasers of the Corporation's Series A Preferred
Stock have requested the Corporation to clarify certain provisions of the
Series A Certificate, and to provide certain protections to the Shareholders
of Series A Preferred Stock of the Corporation (the "Series A Shareholders");
and
WHEREAS, the Board of Directors of the Corporation desires to clarify
the Certificate of Designation and to provide the Series A Shareholders with
certain protections;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors deems it
advisable to adopt, and hereby does adopt, the Corporation's Amended
Certificate of Designations, Preferences and Rights of Series A Preferred
Stock of MicroTel International Inc., a Delaware corporation as follows:
A. DESIGNATION. One series of Preferred Stock, designated Series A
Preferred Stock, is hereby provided for, which shares shall have the rights,
privileges and preferences set forth below.
B. AUTHORIZED NUMBER. The number of shares constituting the Series A
Preferred Stock shall be 200, par value .01 per share.
C. DIVIDEND PROVISIONS. The holders of shares of Series A Preferred
Stock shall not be entitled to receive dividends.
<PAGE>
D. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary, the holders of shares of
Series A Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of this corporation to
the holders of the Common Stock by reason of their ownership, an amount per
share equal to $10,000 (the "Stated Value") for each outstanding share of
Series A Preferred Stock. If upon the occurrence of such event, the assets
and funds thus distributed among the holders of the Series A Preferred Stock
shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amounts, then the entire assets and funds of the
corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock on a share-by-share basis
in proportion to the aggregate preferential amounts of each such series of
Preferred Stock.
(b) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or a sale, conveyance or disposition of
all or substantially all of the assets of this corporation or the
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of, shall not be deemed to be a liquidation, dissolution or winding
up within the meaning of this Section D but shall instead be treated pursuant
to Section E hereto.
E. CONVERSION. The holders of the Series A Preferred Shares shall
have conversion rights as follows (the "Conversion Rights"):
(1) CONVERSION RIGHTS.
(i) All Series A Preferred Share shall be convertible, at
the option of the holders of such shares, at any time after the ninetieth
(90th) day of issuance of such shares, at the office of the Corporation or
any transfer agent for the Series A Preferred Shares, into the number of
fully paid and nonassessable unrestricted and nonlegended Common Shares of
the Corporation at the conversion price per Series A Preferred Share equal to
$10,000 divided by the lesser of (x) $1.25 and (y) One Hundred Percent (100%)
of the arithmetic average of the three lowest closing bid prices (not
necessarily consecutive) over the forty (40) trading days prior to the
exercise date of any such conversion.
(ii) In the event of a call for redemption of any Series A
Preferred Shares pursuant to Section F hereof, each holder of any Series A
Preferred Shares shall have the right to exercise the conversion rights set
forth in this Section E and the right to convert each share shall cease as to
the shares designated for redemption as of the close of business on the
business day immediately prior to the redemption date, unless default is made
in payment of the redemption price. If the Corporation has received a notice
of conversion with respect to any Series A Preferred Shares the Corporation
may not redeem such Series A Preferred Shares provided the Series A Preferred
Shares are delivered for conversion as set forth in Section E(2).
(2) MECHANICS OF CONVERSION.
(i) No fractional shares of Common Stock shall be issued
upon conversion of the Series A Preferred Shares. In lieu of any fractional
share to which the holder would otherwise be entitled, the Corporation shall
round up to the nearest whole share. In the case of a dispute as to the
calculation of the Conversion Rate, the Corporation's calculation shall be
deemed conclusive absent manifest error. In order to convert Series A
Preferred Shares into full shares of Common Stock, the holder shall surrender
the certificate or certificates therefor, duly endorsed, by either overnight
courier or 2-day courier, to the office of the Corporation for the Series A
Preferred Shares, and shall give written notice to the Corporation at such
office that the holder elects to convert the same, the number of shares of
Series A Preferred Shares so converted and a calculation of the Conversion
Rate (with an advance copy of the certificate(s) and the notice by
facsimile); provided, however, that the Corporation shall not be obligated
to deliver certificates evidencing the shares of Common Stock issuable upon
such conversion unless certificates evidencing such Series A Preferred Shares
are delivered to the Corporation as provided above, or the holder notifies
the Corporation that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such
<PAGE>
certificates.
(ii) The Corporation shall use reasonable efforts to cause
to be issued and delivered within two (2) business days after delivery to the
Corporation of such Series A Preferred Shares, or after such agreement and
indemnification, to such holder of Series A Preferred Shares at the address
of the holder on the stock books of the Corporation, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid. The date on which notice of conversion is given (the
"Date of Conversion") shall be deemed to be the date set forth in such notice
of conversion provided the original Series A Preferred Shares to be converted
are received by the Corporation within five (5) business days thereafter and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on such date. If the original
Series A Preferred Shares to be converted are not received by the Corporation
within five (5) business days after the Conversion, the notice of conversion
shall become null and void.
(3) CONVERSION PRICE ADJUSTMENTS. The closing bid price used to
determine the Conversion Price shall be appropriately adjusted to reflect, as
deemed equitable and appropriate by the Corporation, any stock dividend,
stock split or share combination of the Common Stock. In the event of a
merger, reorganization, recapitalization or similar event of or with respect
to the Corporation (a "Corporate Change") (other than a Corporate Change in
which all or substantially all of the consideration received by the holders
of the Company's equity securities upon such Corporate Change consists of
cash or assets other than securities issued by the acquiring entity or any
affiliate thereof), the Series A Preferred Shares shall be convertible into
such class and type of securities as the Holder would have received had the
Holder converted the Series A Preferred Shares immediately prior to such
Corporate Change, as appropriately adjusted to equitably reflect the
conversion price and any stock dividend, stock split or share combination of
the common stock after such corporate event.
(4) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued Common Shares solely for the purpose of effecting the
conversion of the Series A Preferred Shares such number of its Common Shares
as shall from time to time be sufficient to effect the conversion of all
outstanding Series A Preferred Shares; and if at any time the number of
authorized but unissued Common Shares shall not be sufficient to effect the
conversion of all then outstanding Series A Preferred Shares, in addition to
such other remedies as shall be available to the holder of such Series A
Preferred Shares, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but
unissued Common Shares to such number of shares as shall be sufficient for
such purposes.
F. REDEMPTION OF SERIES A PREFERRED SHARES.
(1) OPTIONAL REDEMPTION. The Corporation may redeem all
outstanding and unconverted Series A Preferred Shares for cash at a per share
price equal to $11,500 (115% of the Stated Value) for each Series A Preferred
Share by giving written notice to the Holders at least twenty (20) days in
advance of such redemption. If the Corporation has received a notice of
conversion with respect to any Series A Preferred Shares, the Corporation may
not redeem such Series A Preferred Shares provided the Series A Preferred
Shares are delivered for conversion as set forth in Section E(2) during the
notice period prior to the redemption date as set forth in F(3)(ii) below.
If the Corporation fails to redeem after giving written
notice, it shall pay to the Holders pro-rata a total of five (5%) percent of
the amount to be redeemed as liquidated damages.
(2) MANDATORY REDEMPTION. On May 22, 2003, the Corporation shall
redeem all Series A Preferred Shares then outstanding, by the payment
therefor of the redemption price of $11,500 per share.
(3) MANNER OF REDEMPTION OF SERIES A PREFERRED SHARES.
(i) If less than all of the outstanding Series A Preferred
Shares shall be called for redemption, the particular shares of such series
to be redeemed shall be selected by lot or by such other equitable manner as
may be prescribed by resolution of the Board of Directors.
(ii) Notice of redemption of any Series A Preferred Shares
shall be given by the Corporation by fax or other written communication, at
least twenty (20) days prior to the date fixed by the Board of Directors of the
Corporation for redemption (herein called the "redemption date"), to the holders
of record of the
<PAGE>
shares to be redeemed at their respective addresses then appearing on the
records of the Corporation. The notice of the redemption shall state:
(A) the redemption date,
(B) the redemption price (which must be paid within
five (5) business days after the date of redemption),
(C) whether the redemption is an optional redemption
or a mandatory redemption,
(D) if less than all outstanding Series A Preferred
Shares are to be redeemed, the identification of the Series A Preferred
Shares to be redeemed,
(E) the conversion rate on the date of the notice,
(F) that on the redemption date the redemption price
will become due and payable upon each Series A Preferred Shares to be
redeemed and the right to convert each share of Series A Preferred Share
shall cease as of the close of business on the business day prior to the
redemption date, unless default shall be made in the payment of the
redemption price, and
(G) the place or places where such Series A Preferred
Shares to be redeemed are to be surrendered for payment of the redemption
price.
(4) FAILURE TO REDEEM. If the Corporation fails to pay the
redemption price after calling any Series A Preferred Shares for optional
redemption under Section F(1), the Corporation shall have no further right to
redeem Series A Preferred Shares under Section F(1).
(5) REACQUIRED SHARES. Any shares of the Series A Preferred
Stock converted, redeemed or purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and cancelled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Series A Preferred Stock and may be
reissued at the direction of the Corporation subject to the conditions or
restrictions on issuance set forth herein.
G. CORPORATE EVENTS. In the event of (i) any declaration by the
Corporation of a record date of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive
any dividend (other than cash dividend) or other distribution or (ii) any
capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, and any transfer of all or substantially
all of the assets of the Corporation to any other Corporation, or any other
entity or person, or any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the Corporation shall mail to each holder of
Series A Preferred Shares at least twenty (20) days prior to the record date
specified therein, a notice specifying (A) the date on which any such record
is to be declared for the purpose of such dividend or distribution and a
description of such dividend or distribution, (B) the date on which any such
reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective and
(C) the time, if any, that is to be fixed, as to when the holders of record
of Common Stock (or other securities) will receive for securities or other
property deliverable upon such reorganization, reclassification, transfer,
consolidation, merger, dissolution or winding up.
H. VOTING RIGHTS.
(1) The Holders of the Series A Preferred Shares shall not have
any voting rights except as set forth below or as otherwise from time to time
required by law.
(2) To the extent that under California law the vote of the
holders of the Series A Preferred Shares, voting separately as a class, is
required to authorize a given action of the Corporation, the affirmative vote
or consent of the holders of at least a majority of the outstanding Series A
Preferred Shares shall constitute the approval of such action by the class.
To the extent that under California law the holders of the Series A Preferred
Shares are entitled to vote on a matter with holders of Common Stock voting
together as one class, each Series A Preferred
<PAGE>
Shares shall be entitled to a number of votes equal to the number of shares
of Common Stock into which it is then convertible using the record date for
the taking of such vote of stockholders as the date as of which the
Conversion Price is calculated. Holders of the Series A Preferred Shares
shall be entitled to notice of all shareholder meetings or written consents
with respect to which they would be entitled to vote, which notice would be
provided pursuant to the Corporation's bylaws and applicable statutes.
I. PROTECTIVE PROVISIONS. So long as the Series A Preferred Shares
are outstanding, the Corporation shall not take any action that would impair
the rights of the holders of the Series A Preferred Shares set forth herein
and shall not without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of at least a majority in
aggregate principal amount of the Series A Preferred Shares then outstanding:
(1) Alter or change the rights, preferences or privileges of the
Series A Preferred Shares so as to affect adversely the Series A Preferred
Shares.
(2) For a period of eight (8) months from the issuance of the
Series A Preferred Shares, create any new class or series of stock which
ranks prior to or PARI PASSU to the Series A Preferred Shares with respect to
liquidation preference, other than any additional series of Preferred Shares
issued for a purchase price not to exceed $2 million, which may rank PARI
PASSU.
(3) Do any act or thing which would result in taxation of the
holders of Series A Preferred Shares under Section 305 of the Internal
Revenue Code of 1985, as amended (or any comparable provision of the Internal
Revenue Code as hereafter from time to time amended).
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its authorized officer as of June____ , 1998.
MICROTEL INTERNATIONAL INC.
By:
------------------------------------------
Carmine T. Oliva
President and Chief Executive Officer
<PAGE>
EMPLOYMENT AGREEMENT
This agreement is made as of this 1st day of May, 1998, by and
between Microtel International, Inc., a Delaware corporation with offices at
4290 E. Brickell Street, Ontario, California, 91761-1511 (the "Employer" or
the "Company"), and James P. Butler, who resides at 7716 East Fieldcrest
Lane, Orange, California, 92869, (the "Employee").
WITNESSETH
WHEREAS, the Employee desires to be employed by the Employer, and the
Employer desires to employ the Employee upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and of the
mutual promises, covenants and agreements hereinafter contained the parties
hereto agree as follows:
I. EMPLOYMENT
1.1 EMPLOYMENT. Subject to the provisions for termination as
hereinafter provided, the terms of this agreement shall begin on the date
first written above and shall terminate on May 1, 2001 (the "Employment
Period").
1.2 RENEWAL. Subject to the provisions for termination as
hereinafter provided, this agreement shall be automatically renewed for two
(2) successive one (1) year terms commencing on May 1, 2001, (the"Renewal
Periods") unless, during the following periods, either party to this
Agreement shall notify the other party in writing of its desire not to renew
this Agreement; provided, however, any action required to be taken with
respect to this Employment Agreement by the Employer shall only be taken
after the Executive Compensation and Management Development Committee of the
Board of Directors of the Employer approves such action. The required notice
periods in order to prevent an automatic renewal of this Agreement shall be
as follows:
<TABLE>
<CAPTION>
Period During Which Notice Of
Non-Renewal Must Be Given Renewal Period
- ------------------------- --------------
<S> <C>
3/1/99 to 5/1/00 5/1/01 to 5/1/02
3/1/00 to 5/1/00 5/1/01 to 5/1/02
</TABLE>
<PAGE>
- 2 -
1.3 DUTIES. Subject to Section 1.4, the Employee hereby promises
to perform and discharge well and favorably the duties of Senior Vice
President and Chief Financial Officer and to perform services in such
additional capacities as may be directed by the Chairman and Chief Executive
Officer, and concurred in by the Company's Board of Directors (the "Board")
in accordance herewith. As Chief Financial Officer, the Employee's duties
shall consist of the usual and customary duties of his position and he shall
be subject to the direction and control of the Chairman and Chief Executive
Officer and shall at all times have the authority as shall reasonably be
required to enable him to discharge such duties in an efficient manner.
1.4 REDESIGNATION. The Chairman and Chief Executive Officer may,
in his discretion, with the concurrence of the Board, elect or appoint the
Employee to offices or positions other than, or in addition to, Chief
Financial Officer (hereinafter the "Redesignation") by providing the Employee
with prompt written notice of the Redesignation. If any Redesignation and
related addition to and/or reduction of Employee's duties results in a
substantial net change in the scope of the Employee's responsibilities, the
Employee may elect, in his sole discretion, not to accept such Redesignation
and to resign upon providing written notice of his resignation to the
Employer not less than thirty (30) days after the Employee has been provided
with written notice of the Redesignation. In such event, if such
Redesignation occurs during the Employment Period, the Employer shall pay the
Employee his annual salary, as provided herein, for one (1) year following
the effective date of such resignation or until January 1, 2001, whichever is
the longer period. In the event that the Redesignation shall occur at any
time after the Employment Period, and during one of the Renewal Periods, the
Employer shall pay the Employee his annual salary, as provided herein, for
one (1) year following the effective date of such resignation. All sums
owing hereunder in the event of a Redesignation and a subsequent resignation
by the Employee shall be due and payable within thirty (30) days of the
effective date of such resignation.
1.5 OTHER BUSINESS ACTIVITIES. The Employee shall devote his full
time, attention and energies to the business of the Company and shall not, so
long as he remains in the employ of the Company, be engaged in any other
employment or business of substantial nature, whether or not such business
activity is pursued for gain and profit, without the written consent of the
Company. Nothing contained herein, however, shall be construed as preventing
the Employee from (i) making passive investments of his assets in such form
or manner as he desires, providing such investments: (a) do not require the
Employee to render services in the operations or affairs of the firms,
corporations or other entities in which such investments are made, and (b)
are not made in any business directly or indirectly competing with the
Employer or its subsidiaries or affiliated corporations, if any,
<PAGE>
- 3 -
unless the stock of such company is listed on a national stock exchange and
the Employee owns less than three percent (3%) of the outstanding voting
securities, or (ii) becoming a member of the Board of Directors of any other
corporation that the Employee desires, provided that the corporation upon
whose Board the Employee is a member of is not, in the sole discretion of the
Employer's Board of Directors, in competition with the business of the
Employer.
The Company shall provide the Employee with adequate office and
support staff to accomplish the objectives for which he is employed and in
order to perform the duties as set forth herein.
II. COMPENSATION
2.1 ANNUAL SALARY. The Employer shall pay to the Employee in
compensation for Employee's services hereunder, a base salary at an annual
rate of $125,000, payable in equal periodic installments in accordance with
the customary payroll policy of the Employer. The Employee shall also be
eligible to receive merit or promotional increases in accordance with the
Employer's annual review, or other general review of its officer compensation.
2.2 EXPENSES. The Employer agrees to reimburse the Employee against
his receipts for all reasonable business expenses incurred by him during the
Employment Period or Renewal Periods in connection with the performances of
his services hereunder.
2.3 BONUSES. The Employer agrees that the Employee will be
entitled to participate in any bonus or similar plan approved by the
Employer's Board of Directors.
2.4 STOCK OPTIONS AND OTHER INCENTIVE PLANS. The Employee shall
continue to be eligible to participate in any Incentive Stock Option or
Non-Qualified Stock Option Plan or other incentive plans duly approved by the
Board of Directors for implementation within the Company.
2.5 ADDITIONAL BENEFITS. The Employee shall be entitled to the
customary and usual medical, insurance, fringe and other benefits made
available to the Employer's employees generally.
III. TERMINATION
3.1 TERMINATION DUE TO DEATH. If during the Employment Period or
Renewals thereof, Employee shall die, this Agreement shall terminate, except
that the compensation or other amounts payable hereunder, to or for the
benefit of Employee shall be paid for one (1) year following the death of the
Employee to such person or persons as Employee
<PAGE>
- 4 -
may designate by notice to the Employer from time to time or, in the absence
of such designation, to his legal representatives.
3.2 TERMINATION DUE TO DISABILITY. If during the Employment
Period, or Renewals thereof, Employee shall become physically or mentally
disabled, whether totally or partially, so that he is unable substantially to
perform his services hereunder (i) for a period of 180 consecutive days, or
(ii) for shorter periods aggregating 180 days during any period of eighteen
consecutive months , the Employer may at any time after the last day of the
180 consecutive days of disability or the day on which the shorter periods of
disability shall have equalled an aggregate of 180 days, by 10 days written
notice to Employee (but before Employee has recovered from such disability),
terminate this Agreement. Notwithstanding such disability, the Employer shall
continue to pay Employee compensation or other amounts payable hereunder, to
or for the benefit of Employee up to and including the date one (1) year
after the effective date of such termination.
3.3 TERMINATION FOR CAUSE. The Employer may at any time during the
Employment Period and any Renewals thereof, by notice, terminate this
Agreement and discharge the Employee for cause, whereupon the Employer's
obligation to pay any compensation, severance allowance, or other amounts
payable hereunder to or for the benefit of Employee shall terminate on the
date of such discharge, notwithstanding anything herein contained to the
contrary. As used herein, the term "for cause" shall be deemed to mean and
include chronic alcoholism; drug addiction; misappropriation of any money or
other assets or properties of the Employer or its subsidiaries; wilful
violation of specific and lawful written directions from his supereior or
from the Board of Directors of the Employer; failure or refusal to perform
the services required of Employee under this Agreement; wilful disclosure of
trade secrets or other confidential information resulting in substantial
detriment to the Company as documented by the Employer under oath or
affirmation; conviction in a court of competent jurisdiction of any crime
involving the funds or assets of the Company including, but not limited to,
embezzlement and larceny; any civil or criminal conduct or personal
misbehavior which is detrimental to the image, reputation, welfare or
security of the Employer where such misconduct or misbehavior and judgment
have been documented by the Employer under oath or affirmation; and any other
acts or omissions that constitute grounds for cause under the laws of the
States of Delaware, California, Massachusetts or Illinois, or such other
States wherein the Company may have operations.
3.4 TERMINATION WITHOUT CAUSE. The Employer may terminate this
Agreement without cause at any time upon sixty (60) days written notice to
the Employee. In the event the Employer does terminate this Agreement without
it being "for cause", the Employee, if requested in writing by the Employer,
shall continue to render services at full compensation until the effective
date of such termination. Thereafter, during the Employment Period, Employee
shall be paid his annual salary for one (1) year following the effective
date of such termination, or until May 1, 2000, whichever is the longer
<PAGE>
- 5 -
period. In the event such termination pursuant to this Section 3.4 occurs
during any of the Renewal Periods, the Employee shall be paid his Annual
Salary through the expiration of the particular Renewal Term to which the
Company is obligated under Section 1.2, as well as all other amounts payable
hereunder. Termination "without cause" shall include the ceasing of
operations due to bankrupcy and/or the general inability of the Employer to
meet the Employer's obligations as they become due.
3.5 TERMINATION WITHOUT CAUSE FOLLOWING A CHANGE IN CONTROL. This
Agreement may be terminated by Employer, or successor to Employer, upon
thirty (30) days written notice to Employee upon the happening of any of the
following events:
a. Sale by Employer of substantially all of its assets;
b. Sale, exchange or other disposition of two-thirds or
more of the outstanding capital stock of the Employer;
c. Merger or reorganization in which shareholders of the
Employer immediately prior to such merger or
reorganization receive less than fifty percent(50%) of
the outstanding voting shares of the successor
corporation.
In the event that the Employee's employment is terminated without cause
within two years following a change of control, the Employer or successor to
Employer shall:
a. Pay to Employee, in a lump sum within thirty (30) days
from date of termination, or, at Employee's election,
in installments, the Employee's Annual Salary and all
other amounts payable hereunder for one and one-half (1
1/2) years following the effective date of such
termination or untilMay 1, 2000, whichever is the
longer period.
b. In the event such termination occurs during any of the
Renewal Periods, pay to Employee his Annual Salary to
the expiration of that particular Renewal Period, his
Annual Salary for a period of one year following the
end of such Renewal Period, plus all other amounts
payable hereunder
c. Pay to Employee the average of the Annual Executive
Bonuses awarded to him in the three years preceding
his termination over the same time span and under the
same conditions as Annual Salary.
d. Pay to Employee any Executive Bonus awarded but not yet
paid.
e. Continue Employee's coverage in all benefit programs in
which he was participating on the date of his
termination of employment until the earlier of (1) the
end of the Employment Period or Renewal Period,
<PAGE>
- 6 -
or (2) the date he receives equivalent coverage and
benefits under a subquent employer.
IV. COVENANTS NOT TO COMPETE
4.1 The Employee agrees that (i) during the Employment Period and
any Renewals thereof, or in the event of a termination pursuant to Section
3.3 and, thereafter for a period of one (1) year or (ii) in the event of a
termination pursuant to Sections 3.4 or 3.5 and for the period from the
effective date of such termination until the expiration of a period of
twelve months following his resignation upon Redesignation for the Interim
Period as defined in Section 1.4, he will not act as a principal, agent,
employee, employer, consultant, control person, stockholder, director or
co-partner of any person, firm, business entity other than the Employer, or
in any individual representative capacity whatsoever, directly or indirectly,
without the express consent of the Employer:
(a) engage or participate or be employed in any business
whose products or services are competitive with those of the Employer in the
world; provided, however, that the ownership by the Employee of not more than
three percent (3%) of a corporation or similar business venture shall not be
deemed to be a violation of this covenant as long as the Employee does not
become a controlling person or actively involved in the management of such
corporation or business venture;
(b) approach, solicit business from, or otherwise do
business or deal with any customer of the Employer in connection with any
product or service competitive with any provided by the Employer; provided,
however, the Employee may approach, solicit business from, or otherwise do
business or deal with any subsidiary or division of any customer of the
Employer provided that such customer's division or subsidiary does not
provide a product or service competitive with any provided by the Employer.
(c) approach, counsel, solicit, assist to solicit or
attempt to induce any person who is then in the employ of the Employer, its
affiliates or subsidiaries to leave the employ of the Employer, or employ, or
attempt to employ on behalf of any person or entity any such person or
persons who at any time during the preceding six months was in the employ of
the Employer;
(d) aid or counsel any other person, firm, corporation or
business entity to do any of the above.
For purposes of this Section 4.1, the term "customer" shall
mean (I) any person or entity who was a customer of the Employer at any time
during the last two months of the Employee's employment by the Employer; (ii)
any prospective customer to
<PAGE>
- 7 -
whom the Employer had made a presentation, or similar offering of product(s)
during the last year of the Employee's employment by the Employer.
The Employee acknowledges (I) that his position with the
Employer requires performance of services which are special, unique,
extraordinary and intellectual in character and places him in a position of
confidence and trust with the customers and employees of the Employer,
through which, among other things, he shall obtain knowledge of such
organization's "technical information" and "know how" and become acquainted
with their customers, in which matters such organizations have substantial
proprietary interests, (ii) that the restrictive covenants set forth above
are necessary in order to protect and maintain such proprietary interests and
other legitimate business interests of the Company, and (iii) that the
Employer would not have entered into this agreement unless such covenants
were included herein.
The Employee also acknowledges that the business of the
Employer presently extends throughout the world, that he has personally
supervised or engaged in such business on behalf of the Employer, or will do
so pursuant to the terms of this Agreement, and, accordingly, it is
reasonable that the restrictive covenants set forth above are not more
limited as to geographic area than is set forth therein. The Employee also
represents to the Employer that the enforcement of such covenants will not
prevent the Employee from earning a livelihood.
If any of the provisions of this Section, or any part
thereof, is hereinafter construed to be invalid or unenforceable, the same
shall not affect the remainder of such provision or provisions, which shall
be given full effect, without regard to the invalid portions. If any of the
provisions of this Section, or any part thereof, is held to be unenforceable
because of the duration of such provision, the area covered thereby or the
type of conduct restricted therein, the parties agree that the court making
such determination shall have the power to modify the duration, geographic
area and/or other terms of such provision and, as so modified, said provision
shall then be enforceable. In the event that the courts of any one or more
jurisdictions shall hold such provisions wholly or partially unenforceable by
reason of the scope thereof or otherwise, it is the intention of the parties
hereto that such determination not bar or in any way affect the Employer's
right to the relief provided for herein in the courts of any other
jurisdictions as to breaches or threatened breaches of such provisions in
such other jurisdictions, the above provisions as they relate to each
jurisdiction being, for this purpose, severable into diverse and independent
covenants.
V. CONFIDENTIAL INFORMATION
5.1 DISCLOSURE OF INFORMATION. The Employee recognizes and
acknowledges that the financial information, trade secrets, technical
information, and confidential or proprietary information of the Employer,
including such information as may exist from
<PAGE>
- 8 -
time to time, and information as to the identity of customers or prospective
customers of the Employer and other similar items, are valuable, special and
unique assets of the Employer's business, access to and knowledge of which
are essential to the performance of the duties of the Employee hereunder. The
Employee will not, during or after the term hereof, in whole or in part,
disclose such secrets or confidential, technical or proprietary information
to any person, firm, corporation, association or other entity for any reason
or purpose whatsoever, nor shall the Employee make use of any such property
or information for his own purpose or for the benefit of any person, firm,
corporation or other entity (except the Employer) under any circumstances,
during or after the term hereof, provided that after the term hereof these
restrictions shall not apply to such secrets or information which are then in
the public domain (provided that the Employee was not responsible, directly
or indirectly, for such secrets or information entering the public domain
without the consent of the Employer).
5.2 OWNERSHIP OF INVENTIONS. All of the Employee's right, title
and interest in all developments or improvements devised or conceived by the
Employee, alone or with others, during his working hours, as well as in all
developments or improvements devised or conceived by the Employee, alone or
with others, which relate to any business in which the Employer is then
engaged or contemplating engaging in, regardless of when devised or
conceived, is the exclusive property of the Employer. The Employee shall
promptly disclose all such developments and improvements to the Employer. The
Employee shall not use or disclose any such developments or improvements,
other than in furtherance of the Employer's business, without the Employer's
prior written consent
5.3 RETURN MEMORANDA. Employee hereby agrees to deliver promptly
to the Employer on termination of his employment, or at any other time the
Employer may so request, all memoranda, notes, records, reports, manuals,
drawings and other documents (and all copies thereof) relating to the
Employer's business and all property associated therewith, which he may then
possess or have under his control.
VI. INJUNCTIVE RELIEF
6.1 The Employee acknowledges that the remedy at law for any
breach or threatened breach of Articles IVand V hereof by the Employee will
be inadequate, and that, accordingly, the Employer shall, in addition to all
other available remedies (including without limitation , seeking such damages
as it can be shown it has sustained by reason of such breach), be entitled to
injunctive relief without being required to post bond or other security, and
without having to prove the inadequacy of the available
remedies at law. The Employee agrees not to plead or defend on grounds of
adequate remedy at law or any similar defense in any action by the Employer
against him, or injunctive relief, or for specific performance of any of his
obligations pursuant to Articles IV and V hereof. Nothing herein shall be
construed as prohibiting the Employer from pursuing any other remedies for
such breach or threatened breach.
<PAGE>
- 9 -
VII. MISCELLANEOUS PROVISIONS
7.1 NOTICES AND COMMUNICATIONS. All notices and communications
hereunder shall be in writing and shall be hand-delivered or sent postage
prepaid by registered or certified mail, return receipt requested, to the
address first above written or to such other address of which notice shall
have been given in the manner herein provided.
7.2 ENTIRE AGREEMENT. All prior or contemporaneous agreements
and understandings between the parties with respect to the subject matter of
this Agreement are superseded by this Agreement, and this Agreement
constitutes the entire understanding between the parties. This Agreement may
not be modified, amended, changed or discharged except by a writing signed by
both parties hereto, and then only to the extent therein set forth.
7.3 ASSIGNMENT. This Agreement may be assigned by the Employer
and shall be binding upon and inure to the benefit of the Employer's assigns
and successors. The services to be performed by the Employee pursuant to this
Agreement may not be assigned by the Employee.
7.4 WAIVER. No waiver of any breach of this Agreement or of any
objection to any act or omission connected herewith shall be implied or
claimed by any party, or be deemed to constitute a consent to any
continuation of such breach, act or omission, unless in a writing signed by
the party against whom enforcement of such waiver or consent is sought, and
then only to the extent therein set forth.
7.5 INDEMNIFICATION. The Employer will indemnify Employee, to the
maximum extent permitted by applicable law and the By-laws of the Company,
against all costs, charges and expenses incurred or sustained by him in
connection with any action, suit or other reason of his being an officer,
director or employee of the Employer or any subsidiary or affiliate thereof.
7.6 SECTION HEADINGS. The Section headings of this Agreement are
solely for the purpose of convenience and shall neither be deemed a part of
this Agreement nor used in any interpretation thereof.
7.7 GOVERNING LAW. This Agreement and the relationship of the
parties shall be governed by, and construed in accordance with, the laws of
the state of Delaware, or until such time as the Company's state of
incorporation may be changed to another state within the United States, at
which point the relationship of the parties would then be governed by, and
construed in accordance with, the laws of the new state of incorporation.
<PAGE>
- 10 -
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as
of the day and year first above written.
MICROTEL INTERNATIONAL, INC.
Dated: ___________ By:__________________________
Carmine T. Oliva, Chairman, President and Chief
Executive Officer
Dated: ___________ By:__________________________
Robert B. Runyon, Chairman, Executive Compensation and
Management Development Committee, Board of Directors
Dated: ___________ By:__________________________
James P. Butler, Employee
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<PAGE>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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459
0
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<SALES> 18,713
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