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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22974
CMC INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1434910
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
4950 PATRICK HENRY DRIVE, SANTA CLARA, CA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
-------------------------------
(408) 982-9999
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE -7,681,798 SHARES
OUTSTANDING AS OF MAY 31, 1999
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
<TABLE>
<S> <C>
Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
Item 3. Quantitative and Qualitative Disclosure About Market Risks 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13-14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
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CMC Industries, Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
April 30, 1999 July 31, 1998
Unaudited (*)
-------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,260 $ 5,281
Accounts and notes receivable, net 21,290 31,282
Accounts and notes receivable from affiliate 4,712 5,678
Inventories 30,838 20,275
Other current assets 1,499 2,000
-------- --------
Total current assets 63,599 64,516
Notes receivable from affiliate 950 1,400
Plant and equipment, net 19,276 18,790
Investment in preferred stock of affiliate 5,884 5,884
Other assets 4,296 4,015
-------- --------
$ 94,005 $ 94,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable under lines of credit $ 9,919 $ 18,111
Current portion of long-term debt 1,647 2,146
Accounts payable 31,227 21,365
Other current liabilities 5,189 7,301
-------- --------
Total current liabilities 47,982 48,923
Long-term debt 4,547 2,268
Other liabilities 1,364 1,469
-------- --------
Total liabilities 53,893 52,660
Stockholders' equity
Common stock 78 76
Additional paid-in capital 36,831 36,157
Retained earnings 3,644 6,153
Treasury stock (441) (441)
-------- --------
Total stockholders' equity 40,112 41,945
-------- --------
$ 94,005 $ 94,605
======== ========
</TABLE>
* Condensed from audited consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.
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CMC Industries, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 58,677 $ 58,565 $ 206,991 $ 237,612
Cost of sales 56,405 54,596 200,538 222,580
--------- --------- --------- ---------
Gross profit 2,272 3,969 6,453 15,032
Selling, general and administrative expenses 2,907 2,731 9,354 9,012
--------- --------- --------- ---------
Operating income (loss) (635) 1,238 (2,901) 6,020
Interest expense, net 280 311 1,114 1,063
--------- --------- --------- ---------
Income (loss) before income taxes (915) 927 (4,015) 4,957
Provision (benefit) for income taxes (343) 347 (1,506) 1,858
--------- --------- --------- ---------
Net income (loss) $ (572) $ 580 $ (2,509) $ 3,099
========= ========= ========= =========
Net income (loss) per common share
Basic $ (0.07) $ 0.08 $ (0.33) $ 0.44
Diluted $ (0.07) $ 0.08 $ (0.33) $ 0.41
Weighted average shares outstanding
Basic 7,657 7,440 7,606 7,104
Diluted 7,657 7,724 7,606 7,495
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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CMC Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended April 30,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,509) $ 3,099
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,603 1,629
Change in assets and liabilities:
Receivables 11,408 (5,842)
Inventories (10,563) 4,448
Accounts payable 9,862 (3,207)
Other assets and liabilities (2,216) 842
-------- --------
Net cash provided by operating activities 8,585 969
-------- --------
Cash flows from investing activities:
Capital expenditures (1,928) (2,027)
Payments for equipment held for sale and leaseback -- (1,099)
Deposits for facility under construction in Mexico -- (2,135)
Other -- (1,559)
-------- --------
Net cash used in investing activities (1,928) (6,820)
-------- --------
Cash flows from financing activities:
Borrowings under lines of credit, net (8,192) 4,278
Proceeds from long-term debt 2,092 --
Principal payments on long-term debt (1,254) (1,268)
Proceeds from issuance of stock 676 4,362
-------- --------
Net cash provided by (used in) financing activities (6,678) 7,372
-------- --------
Net increase (decrease) in cash and cash equivalents (21) 1,521
Cash and cash equivalents at beginning of period 5,281 4,298
-------- --------
Cash and cash equivalents at end of period $ 5,260 $ 5,819
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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CMC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary to present fairly the financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1998.
NOTE 2 - INVENTORIES
The components of inventories were as follows (in thousands):
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
--------- --------
<S> <C> <C>
Raw materials and purchased components $ 28,877 $ 17,868
Work-in-process 875 1,637
Finished goods 1,086 770
-------- --------
$ 30,838 $ 20,275
======== ========
</TABLE>
NOTE 3 - NET INCOME PER SHARE
Earnings per share ("EPS") is calculated in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share," which requires the presentation of basic and diluted earnings per share.
Basic EPS was computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted EPS was calculated by
dividing net income by the weighted average number of common shares outstanding
and dilutive common stock equivalent shares outstanding during the respective
periods. Common equivalent shares consist of stock options included in the
computation of EPS using the treasury stock method. A reconciliation of basic
earnings per share to diluted earnings per share for the past three fiscal years
is shown in the following table (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------------------------------------------
July 31, 1998 July 31,1997 July 31, 1996
----------------------------- ------------------------------ ---------------------------
Net Per Share Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount Earnings Shares Amount
-------- ------ ------ -------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Earnings available to
Common shareholders $2,531 7,205 $0.35 $1,606 6,757 $0.24 $105 6,235 $0.02
EFFECT OF DILUTIVE SECURITIES
Stock Options 348 410 214
----- ----- -----
DILUTED EPS
Earnings available to
Common shareholders ------ ----- ------ ----- ---- -----
Plus assumed conversions $2,531 7,553 $0.34 $1,606 7,167 $0.22 $105 6,449 $0.02
==========================================================================================
</TABLE>
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NOTE 4 - SUBSEQUENT EVENT
On May 10, 1999, the Company entered into a definitive merger agreement
with ACT Manufacturing, Inc. ("ACT"), a provider of value-added electronics
manufacturing services for original equipment manufacturers in the networking
and telecommunications, computer, industrial and medical equipment markets. The
closing of the merger with ACT (the "Merger") is subject to the approval of the
shareholders of ACT and the Company, various regulatory approvals and other
customary closing conditions. Under the terms of the agreement, each share of
CMC common stock will be exchanged for 0.5 shares of ACT common stock. The
Merger is expected to be accounted for as a pooling of interest.
CMC INDUSTRIES, INC.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
CMC Industries, Inc. ("CMC" or the "Company") was incorporated in 1990
to acquire certain businesses operated from the Company's Corinth, Mississippi
manufacturing facility since 1960. In August 1993, the Company transferred
certain assets and related liabilities associated with its telecommunications
business to Cortelco Systems Holding Corp. ("Cortelco"), a newly-formed company
owned by certain of the Company's existing stockholders, in exchange for
1,000,000 shares of Preferred Stock of Cortelco. These transactions effectively
transferred to Cortelco all of the Company's assets and liabilities not related
to its contract manufacturing business. This restructuring allowed CMC to focus
on contract manufacturing services while Cortelco pursued the development and
distribution of telephones and telecommunications products.
On May 10, 1999, the Company entered into a definitive merger agreement
with ACT Manufacturing, Inc. ("ACT"), a provider of value-added electronics
manufacturing services for original equipment manufacturers in the networking
and telecommunications, computer, industrial and medical equipment markets. The
closing of the merger with ACT (the "Merger") is subject to the approval of the
shareholders of ACT and the Company, various regulatory approvals and other
customary closing conditions. Under the terms of the agreement, each share of
CMC common stock will be exchanged for 0.5 shares of ACT common stock. The
Merger is expected to be accounted for as a pooling of interest.
Set forth below are analyses of the Company's results of operations for
the three and nine months ended April 30, 1999.
RESULTS OF OPERATIONS
Sales for the third quarter of fiscal year 1999 were $58.7 million as
compared to $58.6 million for the corresponding quarter of the prior year. Sales
for the first nine months of fiscal 1999 were $207.0 million, a 13% decrease
from sales of $237.6 million for the same period of the prior year. Sales to
customers other than Micron Electronics, Inc. ("Micron"), with which business
was discontinued at the end of the second quarter of fiscal 1998, increased
during the first nine months of fiscal 1999 by $40.8 million (to $207.0 million
from $166.2 million) when compared to the corresponding period of the prior
year. For further information on the termination of the Micron business, refer
to the Company's Form 10Q for the quarterly period ended January 31, 1998.
Sales to three customers new to the Company in fiscal 1999, Next Level
Communications ("Next Level"), Telular Corporation ("Telular") and Proxim, Inc.
("Proxim"), were $1.7 million, $1.8 million and $1.3 million,
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respectively, for the third quarter of fiscal 1999 and $16.2 million, $2.9
million and $1.5 million, respectively, for the first nine months of fiscal
1999. Sales to Diamond Multimedia Systems, Inc. ("Diamond") increased during the
third quarter and first nine months of fiscal 1999 when compared to the same
periods of fiscal 1998 by $6.2 million and $47.6 million, respectively, due to
both an increase in shipments and the conversion of the business from
consignment to turnkey. Sales to new customers and the increase in sales to
Diamond were partially offset by the loss of business with Global Village
Communications ("Global Village") following the sale of its modem business to
Boca Research, Inc. ("Boca") in June 1998. Sales to Global Village were $6.1
million and $26.9 million in the third quarter and first nine months of fiscal
1998, respectively, but sales to Boca have been minimal in fiscal 1999.
Gross profit for the third quarter of fiscal 1999 was $2.3 million or
3.9% of sales, as compared to $4.0 million or 6.8% of sales for the third
quarter of fiscal 1998. Gross profit for the first nine months of fiscal 1999
was $6.5 million or 3.1% of net sales, as compared to $15.0 million or 6.3% for
the same period of the prior fiscal year. Gross profit as a percentage of sales
decreased in the third quarter and first nine months of fiscal 1999 when
compared to the corresponding periods of the prior fiscal year principally as a
result of increases in manufacturing overhead costs incurred in anticipation of
higher sales volumes and costs associated with the initiation of new
manufacturing projects. There can be no assurance that any anticipated increase
in sales will occur or that sales will not decrease in future periods. See
"Factors that May Affect the Company".
Selling, general and administrative expenses were $2.9 million or 5.0%
of sales in the third quarter of fiscal 1999, as compared to $2.7 million or
4.7% of sales in the third quarter of fiscal 1998. Such expenses were $9.4
million or 4.5% of sales in the first nine months of fiscal 1999, as compared to
$9.0 million or 3.8% of sales for the corresponding period of the prior year.
Selling, general and administrative expenses were higher on an absolute basis in
the fiscal 1999 periods than in the corresponding periods of fiscal 1998
primarily due to an increase in the Company's sales force and related expenses.
Such expenses as a percentage of sales also increased in the first nine months
of fiscal 1999 as compared to the corresponding period of the prior year due to
the lower sales levels.
Interest expense for the third quarter and first nine months of fiscal
year 1999 was $401,000 and $1,114,000, respectively, as compared to $311,000 and
$1,063,000 for the corresponding periods of fiscal 1998. Interest expense
increased in the third quarter and first nine months of fiscal 1999 when
compared to the corresponding periods of the prior fiscal year primarily due to
an increase in average debt balances associated with the funding of the
Company's expansion of capacity in Mexico. The effect of the higher interest
expense in the fiscal 1999 periods was partially offset by the recognition in
the Company's third fiscal quarter of $121,000 of interest income on a note
receivable from Cortelco. See "Factors that May Affect the Company".
The Company's effective income tax rate was approximately 38%
throughout the first nine months of both fiscal years 1999 and 1998. The
effective income tax rate approximates the blended state and federal statutory
rates in the United States and Mexico.
FACTORS THAT MAY AFFECT THE COMPANY
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ materially from those projected in the forward-looking statements as a
result of certain of the risk factors set forth below and elsewhere in this
document. In addition to the other information contained and incorporated by
reference in this document, the following factors should be considered carefully
in evaluating the Company and its business.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating
results are affected by a number of factors, including the timing and mix of
manufacturing projects, capacity utilization, price competition, the
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degree of automation that can be used in the assembly process, the efficiencies
that can be achieved by the Company in managing inventories and fixed assets,
the timing of orders from customers, fluctuations in demand for customer
products, the timing of expenditures, customer product delivery requirements,
increased costs and shortages of components or labor and economic conditions
generally. All of these factors can cause substantial fluctuations in the
Company's operating results. The Company's expenditures (including, but not
limited to, equipment, inventory and labor) are based, in part, on its
expectations as to future revenues and, to a large extent, are fixed in the
short term. Accordingly, the Company has in the past and may in the future be
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenues, and any significant shortfall of demand in relation to
the Company's expectations or any material delay or cancellation of customer
orders could have an almost immediate material adverse effect on the Company's
operating results. As a result of these and other factors, it is possible that
in some future period, the Company's operating results could fail to meet the
expectations of public market analysts or investors. In such events, or in the
event that adverse conditions prevail or are perceived to prevail generally or
with respect to the Company's business, the trading price of Company's Common
Stock could drop significantly.
The Company's gross profit as a percentage of sales in future periods
may be materially adversely affected by various factors associated with the
Company's production of new product lines, acquisition of new manufacturing
equipment and continued dependence on turnkey contracts (and the inventory risks
inherent therein). Expansion of capacity will result in a higher fixed cost
structure which will require increased revenue and/or significant improvements
in operating efficiencies in order to maintain historical gross margins.
Additionally, the commencement of production of new products typically involves
significant startup costs, lower yields and other inefficiencies. New products
do not generate gross margins as high as products which have been in volume
production for several months. The Company also expects that competition may
continue to intensify, which could also result in lower gross margins.
CUSTOMER CONCENTRATION; DEPENDENCE ON INDUSTRY TRENDS. A small number
of customers are currently responsible for a significant portion of the
Company's net sales. In the nine months ended April 30, 1999 and fiscal years
ended July 31, 1998, 1997 and 1996, the Company's four largest customers in such
periods accounted for approximately 65%, 56%, 61%, and 63%, respectively, of
consolidated net sales. Sales to Micron Electronics, Inc., with whom business
was discontinued in the second quarter of fiscal 1998, accounted for
approximately 24% and 21% of the Company's revenues for the fiscal years ended
July 31, 1998 and July 31, 1997, respectively. Any material delay, cancellation
or reduction of orders from these or other customers could have a material
adverse effect on the Company's results of operations.
The percentage of the Company's sales to its major customers may
fluctuate from period to period. Significant reductions in sales to any of these
customers, or failure to pay in full by any customer of amounts owed to the
Company, could have a material adverse effect on the Company's results of
operations. In addition, customer contracts can be canceled and volume levels
may be materially changed or delayed. The timely replacement of canceled,
delayed or reduced contracts with new business cannot be assured. These risks
are exacerbated because the Company's sales are to customers in segments of the
electronics industry subject to rapid technological change and product
obsolescence. The factors affecting these industries in general, or any of the
Company's major customers in particular, could have a material adverse effect on
the Company's results of operations.
RELATIONSHIP WITH CORTELCO. The Company has had numerous transactions
with its former affiliate and customer, Cortelco Systems Holding Corp.
("Cortelco"). David S. Lee, a director of the Company, is also a director of
Cortelco, and is the largest stockholder of each of the Company and Cortelco.
Transactions between the Company and Cortelco include the transfer of certain
assets and related liabilities associated with the telephone business to
Cortelco in exchange for 1,000,000 shares of Preferred Stock of Cortelco in
August 1993 and the execution of an agreement to provide certain products and
related support services to customers of Cortelco.
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In March 1999, CMC consented to a restructuring of certain assets of
Cortelco. In connection with this restructuring, Cortelco distributed common
stock of Cortelco Systems, Inc. ("CSI") to its shareholders on a pro rata
basis. Pursuant to this distribution, CMC and Cortelco entered into a Stock
Distribution Agreement and CMC received its pro rata share which was equal to
6,125,302 shares of common stock of CSI. CMC also entered into a Stock Purchase
Agreement with Mr. Lee under which, through a series of "put" and "call"
rights, Mr. Lee effectively guarantees CMC's right to receive not less than
approximately $5.9 million in respect of the common stock of CSI and the
preferred stock of Cortelco by May 2002. In consideration for the receipt of
Mr. Lee's guarantee, CMC consented to an amendment to Cortelco's Certificate of
Incorporation which, among other things, delays the dates on which the
preferred stock may be tendered for redemption by CMC.
Furthermore, Cortelco's wholly-owned subsidiary, Cortelco Puerto Rico,
merged into CSI in connection with the above identified distribution. CSI merged
with BCS Technologies, Inc., with CSI being the surviving entity. Finally, CSI
filed a Form S-1 in April 1999 and currently intends to complete an initial
public offering later this year. The Company intends to be a selling shareholder
of shares of common stock in CSI's initial public offering. There can no
assurances that such sale will occur or what the proceeds will be from such
sales, if any.
Historically, Cortelco has not been as current as other customers in
making payments on its trade accounts with the Company. In July 1998, the
Company converted certain older accounts receivable from Cortelco totaling $2.0
million into a note receivable. Under the terms of the note, Cortelco has agreed
to pay the balance over a three-year term with monthly payments of $50,000, plus
interest and a final installment of $200,000 due at the end of the three-year
period. Interest accrues on the note at a rate of 9.0% per annum. As of April
30, 1999, Cortelco had made all payments required at that date under the terms
of the note. The Company continues to provide credit for manufacturing services
sold to Cortelco in the form of trade receivables, and as of April 30, 1999, had
approximately $4.1 million in trade receivables from Cortelco. Cortelco's
payments on its trade accounts with the Company have in the past been late, and
there can be no assurances that such payments or payments on the note will in
the future be made on a timely basis, if at all.
COMPETITION. The electronics manufacturing services industry is
comprised of a large number of companies, several of which have achieved
substantial market share. The Company also faces competition from current and
prospective customers, which evaluate the Company's capabilities against the
merits of manufacturing products internally. The Company competes with different
companies depending on the type of service or geographic area. Certain of the
Company's competitors have broader geographic breadth. They also may have
greater manufacturing, financial, research and development and marketing
resources than the Company. The Company believes that the primary basis of
competition in its targeted markets is manufacturing technology, quality,
responsiveness, and the provision of value-added services and price. To be
competitive, the Company must provide technologically advanced manufacturing
services, high product quality levels, flexible delivery schedules and reliable
delivery of finished products on a timely and price competitive basis. The
Company currently may be at a competitive disadvantage as to price when compared
to manufacturers with lower cost structures, particularly with respect to
manufacturers with established facilities in regions where labor costs are
lower.
SHORTAGES OF ELECTRONICS COMPONENTS. Most of the Company's net sales
are derived from turnkey manufacturing services in which the Company procures
components from third-party suppliers and bears the risk of component shortages.
The electronics industry has been characterized by shortages from time to time
in semiconductor and other components, which shortages have led to allocations
by third-party suppliers. The Company's inability to procure desired supplies of
certain components has in the past led, and may in the future lead, to some
delays in shipments by the Company to its customers. These delays to date have
not had a material adverse effect on the Company's results of operations. If
these component shortages persist or intensify, however, the Company may not be
able to secure quantities required to fulfill customer orders, which could
result in delays in shipments, or cancellation or delays in customer orders,
each of which could have a material adverse effect on the Company's results of
operations.
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MANAGEMENT OF GROWTH. There can be no assurance that the Company will
successfully manage the integration of new business and the growth, if any, of
the Company's operations. In addition, the Company may experience certain
inefficiencies as it manages geographically dispersed operations. Should the
Company increase its expenditures in anticipation of a future level of sales
which does not materialize, its results of operations could be materially
adversely affected. On occasion, customers may require rapid increases in
production which can place an excessive burden on the Company's resources. There
can be no assurance that the Company will be capable of meeting the demands
placed upon the Company's resources by these or any other customers.
ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of
environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals used during its manufacturing process. Any failure by the
Company to comply with present and future regulations could subject it to future
liabilities or the suspension of production. In addition, such regulations could
restrict the Company's ability to expand its facilities or could require the
Company to acquire costly equipment or to incur other significant expenses to
comply with environmental regulations. In this regard, see "Legal Proceedings."
RISK OF DEFECTS. The electronics products manufactured for customers by
the Company are highly complex and may at times contain undetected design and/or
manufacturing errors or failures. Such defects have been discovered in the past,
and there can be no assurance that, despite the Company's quality control and
quality assurance efforts, such defects will not occur in the future. If such
defects occur in quantities or too frequently, the Company's business and
operating results may be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company's
continued success depends to a large extent upon the efforts and abilities of
key managerial and technical employees. The loss of services of certain key
personnel could have a material adverse effect on the Company. The Company's
business also depends upon its ability to continue to attract and retain senior
managers and sales representatives and other skilled employees. Failure to do so
could have a material adverse effect on the Company's operations.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price
of the Company's Common Stock is subject to significant fluctuations in response
to variations in quarterly operating results, general conditions in the
electronics manufacturing services industry as well as the industries of the
Company's customers, and other factors. In addition, the stock market is subject
to price and volume fluctuations which affect the market price for many high
technology companies in particular, and which may or may not be unrelated to
operating performance. Also, the trading price of the Company's Common Stock may
be affected by the announcement of its Merger with ACT. There can be no
assurance as to the trading price of the Company's Common Stock at any time in
the future. In this regard, see "Note 4 to the Condensed Consolidated Financial
Statements".
LIQUIDITY AND CAPITAL RESOURCES
The Company's bank loan agreement is comprised of a revolving credit
line of $30 million and a $5 million term loan. At April 30, 1999, total
borrowings under this facility were $9.9 million under the revolving credit line
and $4.8 million under the term loan. The loan agreement contains financial
covenants related to the Company's net worth and debt service coverage and
restricts capital expenditures. At April 30, 1999 the Company was in default
under the net worth and debt service covenants and has requested a waiver from
the bank with respect to such covenants.
The Company leases its U.S. manufacturing facilities and certain
equipment using both capital and operating lease arrangements. At April 30,
1999, future minimum lease payments under the non-cancelable portion of lease
agreements were $17.6 million, of which $7.2 million is scheduled for payment in
the next twelve months.
The Company's cash and cash equivalents decreased by $21,000 to
$5,260,000 during the nine months ended April 30, 1999. During this period, the
Company's operations provided cash of $8.6 million resulting from
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the netting of a $9.9 million increase in accounts payable, a net profit before
depreciation and amortization of $94,000, a $10.6 million increase in
inventories, an $11.4 million decrease in accounts receivable, a $2.1 million
decrease in accrued liabilities and a $104,000 change in other assets and
liabilities.
The Company used cash of $1.9 million in investing activities during
the nine months ended April 30, 1999, including $535,000 for payments on the
Hermosillo, Mexico facilities. Cash expended in other investing activities was
principally to improve leaseholds and to acquire manufacturing equipment.
Cash used in financing activities in the nine months ended April 30,
1999 totaled $6.7 million on a net basis. Cash provided included $2.1 million of
long-term debt proceeds and $676,000 from the issuance of approximately 169,482
shares of the Company's Common Stock under the Company's stock option and
employee stock purchase plans. Cash used included $8.2 million to reduce
outstanding borrowings under the Company's revolving credit line and $1.3
million to repay long-term debt and capital lease obligations.
The Company's needs for financing in the next twelve months may include
increases in working capital to support sales growth, if any, and expansion of
capacity (plant and equipment). During fiscal 1998, the Company purchased a
4.4-acre tract of land in Hermosillo, Mexico and a 110,000 square foot
manufacturing plant located at this site. The final payment of approximately
$100,000 for this facility is expected to be made in the fourth quarter of
fiscal 1999 using cash on hand and funds available under the Company's lines of
credit, although there can be no assurance of this. The Company expects to meet
its other short-term liquidity requirements generally through net cash provided
by operations, vendor credit terms, operating lease arrangements and short-term
borrowings under its lines of credit.
The Company from time to time evaluates possible business acquisitions,
facility additions and expansion of capabilities. The Company may seek
additional financing as needed to pursue growth opportunities, including any
expansion of capacity; however, there can be no assurance that such financing
will be available on terms acceptable to the Company, if at all.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
manufacturing equipment, computer programs or computer hardware used by the
Company that have date-sensitive software or embedded chips may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to operate equipment, process
transactions, send invoices, or engage in similar normal business activities.
The Company determined in its initial assessment that only
insignificant portions of hardware and software required modification or
replacement so that those systems would properly utilize dates beyond December
31, 1999. The Company presently believes that due to completion of minor
modifications to existing hardware and software, the Year 2000 Issue has been
substantially mitigated, although there can be no assurance of this.
The Company's plan to resolve the Year 2000 Issue involved four phases;
assessment, remediation, testing and implementation. The Company believes that
it has completed its assessment of all material systems that could be affected
by the Year 2000 Issue. The completed assessment indicated that most of the
Company's significant information technology systems and software and hardware
used in manufacturing equipment (hereafter also referred to as operating
equipment) would not be materially affected, although there can be no assurance
of this. Further, the Company does not conduct a significant portion of its
vendor purchase transactions through systems that interface directly with
suppliers.
For its information technology exposures, the Company believes that it
has completed the remediation phase and all software reprogramming and
replacement for all material systems. To date, the Company believes
12
<PAGE> 13
that it has completed its testing and has implemented all of its remediated
systems. However, there can be no assurance that such implementation has
resolved all related Year 2000 issues.
For its operating equipment exposures, the Company believes that it has
completed the remediation phase of the resolution process, although there can be
no assurance of this. Testing of this equipment was more difficult than its
information technology systems but the Company believes that it has completed
its testing and implementation of affected equipment; however, there can be no
assurance that such implementation has resolved all related Year 2000 issues.
With respect to third parties, the Company currently has no material
systems that interface directly with significant vendors. The Company has
queried its important suppliers regarding Year 2000 readiness but to date is not
aware of any problems that would materially impact results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that these third parties will be Year 2000 ready and any inability of those
parties to complete their Year 2000 resolution process could materially impact
the Company.
The Company primarily utilized internal resources to reprogram, to
replace, test and implement, as needed, the software and operating equipment for
Year 2000 modifications. To date, the total cost of the Year 2000 project has
not materially affected the Company's business or results of operations.
However, there can be no guarantee that unexpected events will not occur and
actual results could be materially adversely affected. Specific factors that
might cause such material adverse effects include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee has issued Statement of
Position ("SOP") 98-5, Reporting on the Costs and Start-up Activities, effective
for fiscal years beginning after December 15, 1998 (fiscal 2000 for the
Company). SOP 98-5 requires the costs of start-up activities and organization
costs to be expensed as incurred. In fiscal 1998, the Company capitalized $1.2
million of start-up costs incurred to begin manufacturing operations in
Hermosillo, Mexico. The Company plans to amortize 20%, or $240,000, in fiscal
1999 and expense the balance of $960,000 in fiscal 2000 upon adoption of SOP
98-5.
CMC INDUSTRIES, INC.
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to
its business.
In December 1993, the Company retained the services of an industrial
safety consultant to assist in quantifying the potential exposure to the Company
in connection with clean-up and related costs of a former manufacturing site,
commonly known as the ITT Telecommunications site in Milan, Tennessee and more
particularly described as a 50.1 acre tract surveyed by Construction Layout
Service of Milan, Tennessee. The consultant initially estimated that the cost to
remove the contaminated soil and deliver it to an appropriate
13
<PAGE> 14
hazardous waste site would be approximately $200,000. Based upon this advice,
the Company subsequently entered into a voluntary agreement to investigate the
site with the Tennessee Department of Environment and Conservation. In addition,
the Company agreed to reimburse a tenant of the site $115,000 for expenditures
previously incurred to investigate environmental conditions at the site. The
Company recorded a total provision of $320,000 based on these estimates. In
fiscal 1995, an environmental expert concluded that the cost of a full study
combined with short and long-term remediation of the site may cost between $3
and $4 million. During fiscal 1996, the State of Tennessee's Department of
Environment and Conservation named certain potentially responsible parties
("PRPs") in relation to the former facility. The Company was not named as a PRP.
However, Alcatel, Inc., a PRP named by the State of Tennessee's Department of
Environment and Conservation and a former owner of the Company, is seeking
indemnification from the Company. To date, Alcatel has not filed any legal
proceedings to enforce its indemnification claim. However, there can be no
assurance that Alcatel will not initiate such proceedings or that any other
third parties will not assert claims against the Company relating to remediation
of the site. In the event any such proceedings are initiated or any such claim
is made, the Company believes it has numerous defenses which it will vigorously
assert. There can be no assurance that if any proceedings are initiated or any
such claim is asserted, defense or resolution of such matter will not have a
material adverse effect on the Company's financial position or results of
operations.
In connection with a fiscal 1996 staff reduction, certain terminated
employees subsequently claimed that the Company had engaged in age
discrimination in their dismissal and sought damages of varying amounts. The
Company defended the actual and threatened claims vigorously during fiscal 1998
incurring approximately $275,000 in legal costs over the course of the year. On
August 6, 1998, a judgment was rendered in the favor of one plaintiff in the
amount of $127,000, which the Company subsequently settled for $112,000. A
second plaintiff's claim for $53,000 was filed and subsequently settled for
$48,500. The EEOC negotiated with the Company to reach a monetary settlement for
other potential claimants. Without admitting any liability, the Company entered
into a Conciliation Agreement with the EEOC and agreed to pay approximately
$500,000 to settle all such claims and limit future litigation costs. As a
result of these events and the significant ongoing costs to defend these claims,
in October 1998, the Company concluded that its interest would be best served to
settle all such matters. The Company reserved $975,000 to resolve all such
claims, which represented its best estimate of funds to ultimately be paid to
such claimants. This charge was recorded in the fiscal year ended July 31, 1998.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10.1 Stock Distribution Agreement between CMC Industries, Inc. and Cortelco
Systems Holding Corp. dated March 15, 1999.
10.2 Stock Purchase Agreement between CMC Industries, Inc. and David S. Lee dated
March 15, 1999.
10.3 Registration Rights Agreement between CMC Industries, Inc. and Cortelco
Systems, Inc. dated March 15, 1999.
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended April 30, 1999.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMC INDUSTRIES, INC.
--------------------------------------
Registrant
Date: June 8, 1999 /s/ Matthew G. Landa
--------------------------------------
Matthew G. Landa
President and Chief Executive
Officer
Date: June 8, 1999 /s/ Andrew J. Moley
--------------------------------------
Andrew J. Moley
Executive Vice President and
Chief Financial Officer
15
<PAGE> 1
EXHIBIT 10.1
STOCK DISTRIBUTION AGREEMENT
THIS STOCK DISTRIBUTION AGREEMENT (this "Agreement") is made and
entered into as of March 15, 1999 between CMC Industries, Inc., a Delaware
corporation ("CMC") and Cortelco Systems Holding Corp., a Delaware corporation
("CSHC")
RECITALS
A. CMC owns 1,000,000 shares of Series A Preferred Stock,
liquidation preference $12.50 per share (the "CSHC Preferred Shares"), of CSHC.
B. Article V.b. of CSHC's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") provides, in pertinent part,
that holders of the CSHC Preferred Shares shall be entitled to receive, prior
and in preference to any declaration or payment of any dividend on the common
stock of CSHC, dividends at the rate of $0.75 per share, noncumulative, provided
that such dividends shall be cumulative during each fiscal year of CSHC
beginning on or after August 1, 1995 in which CSHC's net income after tax is at
least $2,000,000.
C. The CSHC net income after tax for the fiscal years ended July 31,
1996, 1997 and 1998, respectively, was less than $2,000,000, with the effect
that no dividends on the CSHC Preferred Shares have accumulated.
D. CMC has never received a dividend in respect of the CSHC
Preferred Shares.
E. CSHC intends to distribute to its stockholders (the "CSI
Spin-Off"), 100% of the shares of common stock, $.0001 par value per share (the
"CSI Shares"), of Cortelco Systems, Inc., a Delaware corporation ("CSI") owned
by CSHC on the date hereof.
F. The CSI Spin-Off will include a distribution to CMC with respect
to the CSHC Preferred Shares of 6,125,302 CSI Shares (the "Preferred
Distribution") and a distribution to the holders of CSHC common stock (the
"Common Stockholders") of 100% of the remaining CSI Shares owned by CSHC on the
date hereof (the "Common Distribution").
G. Immediately prior to the CSI Spin-Off, CSHC will amend (the
"Amendment") the Certificate of Incorporation to, among other things, (i) delay
the date(s) on which the CSHC Preferred Shares may be tendered for redemption at
the option of the holder; (ii) provide for the voluntary conversion of CSHC
Preferred Shares by the holder(s) thereof into CSHC common stock; and (iii)
increase the authorized common stock of CSHC.
H. Pursuant to the Registration Rights Agreement of even date
herewith between CSI and CMC (the "Registration Rights Agreement") CSI will
provide CMC certain piggyback registration rights with respect to CSI shares
delivered to CMC in the Preferred Distribution.
I. The parties hereto desire to express certain consents and
agreements in respect of the CSI Spin-Off and the Amendment.
1.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the covenants,
agreements and consents set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound, the parties agree as follows:
1. Pursuant to Sections 228 and 242(b)(2) of the Delaware General
Corporation Law, as amended, CMC hereby expresses its written consent to the
Amendment to the Certificate of Incorporation in the form attached hereto as
Exhibit A (the "Amendment").
2. Conditioned upon its receipt of 6,125,302 CSI Shares in the
Preferred Distribution, CMC hereby waives all rights to dividends for periods
prior to the date hereof.
3. CSHC hereby acknowledges and waives any objection, claim or cause
of action with respect to that certain Stock Purchase Agreement dated as of
March 15, 1999 between CMC and David S. Lee (the "Stock Purchase Agreement"),
and agrees that it will not take any action to enjoin, suspend or otherwise
affect the performance of that agreement by the parties thereto.
4. CSHC hereby represents and warrants, as of the date hereof, as
follows:
(A) CAPITALIZATION. The authorized capital stock of CSHC
consists of (i) 40,000,000 shares of Common Stock, par value of $0.001 per
share, of which 30,225,815 shares are issued and outstanding; and (ii)
10,000,000 shares of Preferred Stock, par value of $0.001 per share, of which
(A) 1,000,000 shares have been designated Series A Preferred Stock, and of which
1,000,000 shares are issued and outstanding, and (B) 100,000 shares have been
designated Series B Preferred Stock, and of which no shares are issued and
outstanding. All issued and outstanding shares of capital stock of CSHC are
validly issued, fully paid and nonassessable. Except as set forth on a schedule
of exceptions hereto, there are no subscriptions, options, warrants, equity
securities, partnership interests or similar ownership interests, calls, rights
(including preemptive rights), commitments or agreements of any character to
which CSHC is a party or by which it is bound obligating CSHC to issue, deliver
or sell, or cause to be issued, delivered or sold, or repurchase, redeem or
otherwise acquire, or cause the repurchase, redemption or acquisition of, any
shares of capital stock, partnership interests or similar ownership interests of
CSHC or obligating CSHC to grant, extend, accelerate the vesting of or enter
into any such subscription, option, warrant, equity security, call, right,
commitment or agreement, except for options to purchase 2,130,500 shares of
Common Stock.
(B) AUTHORITY RELATIVE TO THIS AGREEMENT. CSHC has all
necessary corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by CSHC and
the consummation by CSHC of the transactions contemplated hereby have been duly
and validly authorized by all necessary corporate action on the part of CSHC and
no other corporate proceedings on the part of CSHC are necessary to authorize
this Agreement or to consummate the transactions so contemplated. This Agreement
has been duly and validly executed and delivered by CSHC and, assuming the due
authorization, execution and delivery by CMC, constitutes legal and binding
obligations of CSHC, enforceable against CSHC in accordance with its terms.
2.
<PAGE> 3
(C) NO CONFLICT; REQUIRED FILING AND CONSENTS.
(I) The execution and delivery of this Agreement does
not, and the performance of this Agreement by CSHC shall not, (i) conflict with
or violate the Certificate of Incorporation or Bylaws of CSHC, (ii) conflict
with or violate any law, rule, regulation, order, judgement or decree applicable
to CSHC or by which its properties is bound or affected, or (iii) result in any
breach of or constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or impair CSHC's rights or alter the
rights or obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of CSHC
pursuant to, any material note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
CSHC is a party or by which CSHC or its properties are bound or affected.
(II) The execution and delivery of this Agreement does
not, and the performance of this Agreement by CSHC shall not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any court, administrative agency, commission, governmental or regulatory
authority, domestic or foreign (a "Governmental Entity"), except (A) for
applicable requirements, if any, of the Securities Act of 1933, as amended (the
"Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and state securities laws ("Blue Sky Laws") and (B) where the
failure to obtain such consents, approvals, authorizations or permits, or to
make such filing or notifications, would not be material to the CSHC or have a
material adverse effect on the parties hereto, prevent consummation of the
transactions contemplated by this Agreement or otherwise prevent the parties
hereto from performing their obligations under this Agreement
(D) COMPLIANCE; PERMITS. CSHC is not in conflict with, or in
default or violation of, (i) any law, rule, regulation, order, judgement or
decree applicable to CSHC or by which its properties is bound or affected, or
(ii) any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which CSHC is a
party or by which CSHC or its properties is bound or affected, except in the
case of clauses (i) and (ii) above for any conflicts, defaults or violations
that (individually or in the aggregate) would not cause the CSHC to lose any
material benefit or incur any material liability. No investigation or review by
any governmental or regulatory body or authority is pending or, to the knowledge
of CSHC, threatened against CSHC, nor has any governmental or regulatory body or
authority indicated an intention to conduct the same, other than, in each such
case, those the outcome of which could not, individually or in the aggregate,
reasonably be expected to have the effect of prohibiting or materially impairing
any business practice of CSHC, any acquisition of material property by CSHC or
the conduct of business by CSHC.
(E) LITIGATION. There are no claims, actions, suits or
proceedings pending or, to the knowledge of CSHC, threatened (or, to the
knowledge of CSHC, any governmental or regulatory investigation pending or
threatened) against CSHC or any properties or rights of CSHC, before any court,
arbitrator or administrative, governmental or regulatory authority or body,
domestic or foreign.
3.
<PAGE> 4
(F) CSHC has heretofore furnished CMC with the unaudited
balance sheets of CSHC as of January 31, 1999, and as of July 31, 1998, and the
related statements of income, shareholders' equity and changes in financial
position for the periods then ended (the "Company Financial Statements"). Such
financial statements have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods indicated;
provided, however, that certain year-end audit adjustments have not been made
and such financial statements omit footnotes otherwise required by generally
accepted accounting principles. The balance sheets included in CSHC Financial
Statements fairly present the financial condition of CSHC at the dates thereof
and, except as indicated therein, reflect all claims against and all debts and
liabilities of CSHC, fixed or contingent, as at the dates thereof; and the
related statements of income, expenses and retained earnings fairly present the
results of the operations of CSHC. Since January 31, 1999, there has been (i) no
material adverse change in CSHC, whether as a result of any legislative or
regulatory change, revocation of any license or rights to do business, fire,
explosion, accident, casualty, labor trouble, flood, drought, riot, storm,
condemnation or action of God or other public force or otherwise and (ii) to
CSHC's knowledge, no fact or condition exists or is contemplated or threatened
which might cause such a material adverse change in the future.
(G) CSHC has no outstanding claims, liabilities or
indebtedness, contingent or otherwise, except as set forth in the CSHC Financial
Statements or referred to in any footnotes thereto, other than liabilities
incurred subsequent to January 31, 1999 in the ordinary course of business. CSHC
is not in default in respect of the terms or conditions of any indebtedness.
5. As an inducement to CSHC's execution, delivery and performance of
this Agreement, CMC represents and warrants to CSHC that:
(A) The execution, delivery and performance of this
Agreement, the Stock Purchase Agreement and the Registration Rights Agreement
(hereinafter defined) have been duly authorized by all requisite corporate
action by CMC and constitute the legal, valid and binding obligations of CMC,
enforceable in accordance with their respective terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and other laws of general application affecting enforcement of
creditor's rights generally, as limited by laws relating to the availability of
specific performance, injunctive relief, or other equitable remedies, or (ii) to
the extent that Registration Rights Agreement may be limited to applicable
federal or state securities laws or public policy considerations.
(B) There is not any action currently pending against CMC
seeking to enjoin the performance of this Agreement or any of the transactions
or agreements referred to herein by CMC.
(C) CMC is the lawful and record owner of the CSHC Preferred
Shares and has good and valid title thereto, has not granted a proxy to any
other person to vote the CSHC Preferred Shares or give or withhold any written
consent with respect thereto, nor has CMC committed to do any of the foregoing.
4.
<PAGE> 5
(D) CMC is not required to obtain the consent of any third
party prior to the execution, delivery and performance of this Agreement, or, if
any such consent is required, such consent has been or will be obtained.
6. The consents, covenants and agreements of CMC hereunder are
subject to satisfaction (or waiver) of the following conditions:
(A) David S. Lee shall have executed and delivered the Stock
Purchase Agreement to CMC.
(B) CSI shall have executed and delivered to CMC a
Registration Rights Agreement in the form attached hereto as Exhibit B.
(C) The CSHC Board shall have declared the distribution
constituting the CSI Spin-Off, subject to execution, delivery and effectiveness
of this Agreement.
7. This Agreement may be amended only by written instrument signed
by each of the parties hereto. No modification or waiver of any provision of
this Agreement or consent to departure therefrom shall be effective unless in
writing and signed by the party against whom enforcement is sought.
8. This Agreement shall be binding on and shall inure to the benefit
of the parties and their respective successors and assigns.
9. This Agreement shall in all respects be governed by the laws of
the State of Delaware without regard to choice of law principles thereunder.
10. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, and all of which together shall
constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
CMC INDUSTRIES, INC.
By: /s/ Matthew G. Landa
-----------------------------------
Name: Matthew G. Landa
Title: President & CEO
CORTELCO SYSTEMS HOLDING CORP.
By: /s/ Stephen R. Bowling
-----------------------------------
Name: Stephen R. Bowling
Title: President
5.
<PAGE> 1
EXHIBIT 10.2
STOCK PURCHASE AGREEMENT
This Agreement is made and entered into as of March 15, 1999 between
CMC Industries, Inc., a Delaware corporation ("CMC") and David S. Lee ("Mr.
Lee").
RECITALS
A. CMC will receive 6,125,302 shares of common stock of Cortelco
Systems, Inc. ("CSI") in a distribution (the "Distribution") from Cortelco
Systems Holding Corp. ("CSHC") and will have the right to sell such shares ("CSI
Common shares") as a Selling Shareholder in the first firmly underwritten public
offering by CSI of CSI Common Shares pursuant to a registration statement
declared effective by the Securities and Exchange Commission (the "IPO"), in
accordance with that certain Stock Distribution Agreement and that certain
Registration Rights Agreement of even date herewith.
B. CMC also owns 1,000,000 shares of CSHC Series A Preferred Stock
(which, together with any CSHC common stock into which such shares may be
converted, are referred to as "CSHC Preferred shares").
C. Mr. Lee, as a major shareholder in CSHC, in order to induce CMC
to facilitate the Distribution, is willing to ensure that CMC can realize an
agreed on value for its CSI common stock by agreeing to purchase CSI common
stock and CSHC Preferred Shares from CMC under the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants and agreements set
forth herein, and for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound,
the parties agree as follows:
1. If the IPO has not been completed by December 1, 1999, CMC may at
its option sell to Mr. Lee, and Mr. Lee will purchase from CMC upon exercise of
such option, 2,602,524 CSI Common shares and 424,881 CSHC Preferred shares for
$2,500,000 in cash. The closing of such purchase and sale will take place at
such place and at such time as CMC may reasonably designate, and Mr. Lee shall
at such closing pay the purchase price for such securities, against delivery
thereof, by cashiers check or by wire transfer of funds to such account or
accounts as CMC may designate.
2. If the IPO has not been completed by December 1, 2000, CMC may at
its option sell to Mr. Lee, and Mr. Lee will purchase from CMC upon exercise of
such option, an additional 2,602,524 CSI Common shares and 424,881 CSHC
Preferred shares from CMC for $2,500,000 in cash. The closing of such purchase
and sale will take place at such place and at such time as CMC may reasonably
designate, and Mr. Lee shall at such closing pay the purchase price for such
securities, against delivery thereof, by cashiers check or by wire transfer of
funds to such account or accounts as CMC may designate.
3. If the IPO has not been completed by December 1, 2001, CMC may at
its option sell to Mr. Lee, and Mr. Lee will purchase from CMC upon exercise of
such option, the
1.
<PAGE> 2
remaining 920,254 CSI Common shares and 78,638 CSHC Preferred shares from CMC
for $884,000 in cash. The closing of such purchase and sale will take place at
such place and at such time as CMC may reasonably designate, and Mr. Lee shall
at such closing pay the purchase price for such securities, against delivery
thereof, by cashiers check or by wire transfer of funds to such account or
accounts as CMC may designate.
4. In the event an IPO is completed prior to December 1, 2001 and
through such IPO or a combination of such IPO and sales under paragraphs 1
and/or 2 above, CMC has received less than $5,884,000 in connection with the
sale of CSI Common shares received by it in the Distribution, then CMC may at
its option (the "Final CMC Option") sell to Mr. Lee, and Mr. Lee will purchase
from CMC upon exercise of such option, all of CMC's remaining CSHC Preferred
Shares (other than 71,600 CSHC Preferred shares) and all of CMC's remaining CSI
Common shares (if any) for the "Final Lee Buyout Payment." The Final Lee Buyout
Payment will equal $5,884,000 less all monies received by CMC from any sales of
CSI Common shares received in the Distribution and sales of CSHC Preferred
shares hereunder, but not less than $1.00. The closing of such purchase and sale
will take place at such place and at such time as CMC may reasonably designate,
and Mr. Lee shall at such closing pay the purchase price for such securities,
against delivery thereof, by cashiers check or by wire transfer of funds to such
account or accounts as CMC may designate.
5. If CMC has received more than $5,884,000 from sales of CSI Common
Shares and CSHC Preferred shares or if CMC does not exercise the Final CMC
Option prior to February 1, 2002, Mr. Lee will have the option to purchase the
remaining CSI Common shares and CSHC Preferred shares then held by CMC (other
than 71,600 CSHC Preferred shares) at any time prior to May 1, 2002 for the
"Final Lee Buyout Payment." In addition, in the event CMC has received more than
$5,884,000 from such sales, Mr. Lee will have the option to purchase, at any
time prior to May 1, 2002, the final 71,600 CSHC Preferred shares, less that
number of CSHC Preferred shares which, when multiplied by $12.50, represents the
amount in dollars that, when added to the monies actually received by CMC from
all such sales in excess of $5,884,000, would provide CMC with a cumulative
return of 8% per annum on the principal balance of $5,884,000 from March 1, 1999
to the date of payment, for a purchase price of $0.01 per share. The closing of
such purchase and sale will take place at such place and time as Mr. Lee may
reasonably designate, and Mr. Lee shall at such closing pay the purchase price
for such securities, against delivery thereof, by check.
6. Unless and until Mr. Lee has defaulted in the performance of his
obligations hereunder (including without limitation the failure to make the
Final Lee Buyout Payment), in the event CMC either (a) elects not to sell all
CSI Common shares that it has the right to sell in the IPO, despite having the
opportunity to do so or (b) sells or otherwise disposes of CSI Common shares at
any time prior to the IPO or of CSHC Preferred shares at any time (except for
such sales as are expressly contemplated by this Agreement or in connection with
a sale of all or substantially all of CMC's assets to a purchaser who assumes
this Agreement or upon a redemption of CSHC Preferred shares) without Mr. Lee's
consent, Mr. Lee may by written notice to CMC terminate this Agreement. In
addition, unless and until Mr. Lee has defaulted in the performance of his
obligations hereunder (including without limitation failure to make the Final
Lee Buyout Payment), in the event CMC continues to hold any CSI Common shares
after the IPO, CMC shall provide Mr. Lee 30 days prior written notice of its
intention to sell or
2.
<PAGE> 3
dispose of all or any portion of such CSI Common shares and during such 30-day
period provide Mr. Lee with the opportunity to assist in the placement of such
shares.
7. Mr. Lee covenants and agrees to use his best efforts to cause the
Distribution to occur and to cause CSI to enter into a merger agreement with BCS
and to complete such merger within 30 days of the Distribution.
8. Share numbers used in this Agreement are subject to adjustment
from time to time to reflect stock splits, stock dividends and other changes in
the capitalization of CSI and CSHC, including in particular a pending
one-for-ten reverse stock split by CSI.
9. No modification or waiver of any provision of this Agreement or
consent to departure therefrom shall be effective unless in writing and signed
by the party against whom enforcement is sought.
10. Mr. Lee may not assign or transfer any of his rights or
obligations hereunder to any other party otherwise than by will or by the laws
of descent or distribution without the prior consent of CMC, and any attempted
assignment in violation hereof shall be void and of no effect. CMC may assign
any or all of its rights and obligations hereunder to any other party. Subject
to the first sentence of this Section 9, all covenants and agreements of the
parties contained in this Agreement shall be binding upon and inure to the
benefit of their respective successors and assigns.
11. This Agreement shall in all respects be governed by the laws of
the State of California without regard to choice of law principles thereunder.
12. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, and all of which together shall
constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Purchase Agreement as of the date set forth above.
CMC INDUSTRIES, INC.
By: /s/ Matthew G. Landa
-----------------------------------
Name:
Title:
DAVID S. LEE
/s/ David S. Lee
--------------------------------------
3.
<PAGE> 1
EXHIBIT 10.3
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is entered into by
and between CMC Industries, Inc. ("CMC") and Cortelco Systems, Inc. (the
"Company") as of March 15, 1999.
WHEREAS, CMC is or will be the recipient of common stock of the Company
upon the distribution thereof to CMC by Cortelco Systems Holding Corp. ("CSHC"),
and
WHEREAS, as an inducement to Holder to facilitate such distribution and
participate therein, the Company has agreed to grant CMC certain registration
rights on the terms and conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the covenants agreements set forth
herein, and for good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. DEFINITIONS.
1.1 REGISTRATION. The terms "REGISTER," "REGISTERED" and
"REGISTRATION" refer to a registration effected by preparing and filing a
registration statement in compliance with the 1933 Act, and the declaration or
ordering of effectiveness of such registration statement.
1.2 REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES"
means: (a) all the shares of Common Stock of the Company issued or issuable from
time to time to CMC and (b) any shares of Common Stock issued as (or issuable
upon the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, all such shares of Common Stock described in clause (a) of
this Section 1.2, excluding in all cases, however, any Registrable Securities
sold by a person in a transaction in which rights under this Agreement are not
assigned in accordance with this Agreement or any Registrable Securities sold to
the public or sold pursuant to Rule 144 promulgated under the 1933 Act.
1.3 HOLDER. For purposes of this Agreement, the term "HOLDER"
means CMC and/or any assignee of record of Registrable Securities to whom rights
under this Agreement have been duly assigned in accordance with this Agreement.
1.4 FORM S-3. The term "FORM S-3" means such form under the
1933 Act as is in effect on the date hereof or any successor registration form
under the 1933 Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
1.5 SEC. The term "SEC" or "COMMISSION" means the U.S.
Securities and Exchange Commission.
1.
<PAGE> 2
2. PIGGYBACK REGISTRATIONS. The Company shall notify all
Holders of Registrable Securities in writing at least ten (10) days prior to
filing any registration statement under the 1933 Act for purposes of effecting a
public offering of securities of the Company (including, but not limited to,
registration statements relating solely to secondary offerings of securities of
the Company, but excluding registration statements on Form S-8 or Form S-4
relating to any employee benefit plan or a corporate reorganization) and will
afford each such Holder an opportunity to include in such registration statement
all or any part of the Registrable Securities then held by such Holder. Each
Holder desiring to include in any such registration statement all or any part of
the Registrable Securities held by such Holder shall, within twenty (20) days
after receipt of the above-described notice from the Company, so notify the
Company in writing, and in such notice shall inform the Company of the number of
Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
2.1 UNDERWRITING. If a registration statement under which the
Company gives notice under this Section 2 is for an underwritten offering, then
the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriter(s) selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the managing
underwriter determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriter(s) may exclude shares (including Registrable Securities) from the
registration and the underwriting, and the number of shares that may be included
in the registration and the underwriting shall be allocated, first, to the
Company, and second, to each of the Holders requesting inclusion of their
Registrable Securities in such registration statement on a pro rata basis based
on the total number of Registrable Securities then held by each such Holder;
provided, however, that the right of the underwriters to exclude shares
(including Registrable Securities) from the registration and underwriting as
described above shall be restricted so that (i) the number of Registrable
Securities included in any such registration is not reduced below seventeen and
one-half percent (17.5%) of the shares included in the registration, and (ii)
any such exclusion shall be allocated pro rata among selling stockholders on the
basis of the number of shares proposed to be sold in the underwriting, provided
that Registerable Securities shall comprise not less than forty percent (40%) of
the shares to be sold by such selling stockholders. If any Holder disapproves of
the terms of any such underwriting, such Holder may elect to withdraw therefrom
by written notice to the Company and the underwriter, delivered at least two (2)
days prior to the effective date of the registration statement. Any Registrable
Securities excluded or withdrawn from such underwriting shall be excluded and
withdrawn from the registration.
2.
<PAGE> 3
2.2 EXPENSES. All expenses incurred in connection with a
registration pursuant to this Section 2 (excluding underwriters' and brokers'
discounts and commissions), including, without limitation all federal and "blue
sky" registration and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company shall be borne by the Company.
3. FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders of Registrable Securities a written request or requests that
the Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, then the Company will:
3.1 NOTICE. Promptly give written notice of the proposed
registration and the Holder's or Holders' request therefor, and any related
qualification or compliance, to any other Holders of Registrable Securities; and
3.2 REGISTRATION. As soon as practicable, effect such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within ten (10) days after receipt of such written notice
from the Company; provided, however, that the Company shall not be obligated to
effect any such registration, qualification or compliance pursuant to this
Section 3:
(A) if Form S-3 is not available for such offering by
the Holders;
(B) if the Holders, together with the holders of any
other securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than $500,000;
(C) if the Company shall furnish to the Holders a
certificate signed by the President or Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its stockholders
for such Form S-3 Registration to be effected at such time, in which event the
Company shall have the right to defer the filing of the Form S-3 registration
statement no more than once during any twelve month period for a period of not
more than 90 days after receipt of the request of the Holder or Holders under
this Section 3;
(D) if the Company has, within the twelve (12) month
period preceding the date of such request, already effected two (2)
registrations on Form S-3 for the Holders pursuant to this Section 3; or
(E) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance and where the Company has not previously qualified to do business or
given such a general consent to service in such jurisdiction.
3.
<PAGE> 4
3.3 EXPENSES. Subject to the foregoing, the Company shall
file a Form S-3 registration statement covering the Registrable Securities and
other securities so requested to be registered pursuant to this Section 3 as
soon as practicable after receipt of the request or requests of the Holders for
such registration. The Company shall pay all expenses incurred in connection
with each registration requested pursuant to this Section 3, (excluding
underwriters' or brokers' discounts and commissions), including without
limitation all filing, registration and qualification, printers' and accounting
fees and counsel for the Company.
4. OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:
4.1 Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to ninety (90) days.
4.2 Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the 1933 Act with respect to the disposition of all securities
covered by such registration statement.
4.3 Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents as they may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by them that are included in such registration.
4.4 Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
4.5 In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such agreement.
4.6 Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
4.
<PAGE> 5
4.7 Furnish, at the request of any Holder requesting
registration of Registrable Securities, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities are
being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated as of such date, of
the counsel representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities and (ii) a
"comfort" letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
5. FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 2 or 3 that
the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to timely effect the
registration of their Registrable Securities.
6. [INTENTIONALLY OMITTED].
7. INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 2 or 3:
7.1 BY THE COMPANY. To the extent permitted by law, the
Company will indemnify and hold harmless each Holder, the partners, officers and
directors of each Holder, any underwriter (as defined in the 1933 Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended,
(the "1934 ACT"), against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the 1933 Act, the 1934 Act or
other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively, a
"VIOLATION"):
(A) any untrue statement or alleged untrue statement
of a material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto;
(B) the omission or alleged omission to state therein
a material fact required to be stated therein, or necessary to make the
statements therein not misleading; or
(C) any violation or alleged violation by the Company
of the 1933 Act, the 1934 Act, any federal or state securities law or any rule
or regulation promulgated under the 1933 Act, the 1934 Act or any federal or
state securities law in connection with the offering
5.
<PAGE> 6
covered by such registration statement; and the Company will reimburse each such
Holder, partner, officer or director, underwriter or controlling person for any
legal or other expenses reasonably incurred by them, as incurred, in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
Section 7.1 shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld), nor
shall the Company be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
such Holder, partner, officer, director, underwriter or controlling person of
such Holder.
7.2 BY SELLING HOLDERS. To the extent permitted by law, each
selling Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the registration statement, each
person, if any, who controls the Company within the meaning of the 1933 Act, any
underwriter and any other Holder selling securities under such registration
statement or any of such other Holder's partners, directors or officers or any
person who controls such Holder within the meaning of the 1933 Act or the 1934
Act, against any losses, claims, damages or liabilities (joint or several) to
which the Company or any such director, officer, controlling person, underwriter
or other such Holder, partner or director, officer or controlling person of such
other Holder may become subject under the 1933 Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling person, underwriter or other
Holder, partner, officer, director or controlling person of such other Holder in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 7.2 shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably withheld; and
provided further, that the total amounts payable in indemnity by a Holder under
this Section 7.2 in respect of any Violation shall not exceed the net proceeds
received by such Holder in the registered offering out of which such Violation
arises.
7.3 NOTICE. Promptly after receipt by an indemnified party
under this Section 7.3 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 7.3,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such
6.
<PAGE> 7
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, shall relieve such indemnifying party of
any liability to the indemnified party under this Section 7.3, but the omission
so to deliver written notice to the indemnifying party will not relieve it of
any liability that it may have to any indemnified party otherwise than under
this Section 7.3.
7.4 DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing
indemnity agreements of the Company and Holders are subject to the condition
that, insofar as they relate to any Violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "FINAL
PROSPECTUS"), such indemnity agreement shall not inure to the benefit of any
person if a copy of the Final Prospectus was furnished to the indemnified party
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the 1933 Act.
7.5 CONTRIBUTION. In order to provide for just and equitable
contribution to joint liability under the 1933 Act in any case in which either
(i) any Holder exercising rights under this Agreement, or any controlling person
of any such Holder, makes a claim for indemnification pursuant to this Section 7
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, or (ii) contribution under the 1933 Act may be
required on the part of any such selling Holder or any such controlling person
in circumstances for which indemnification is provided under this Section 7;
then, and in each such case, the Company and such Holder will contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion as is appropriate to reflect
the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the acts or omissions which
resulted in such loss, claim, damage or liability, as well as any other relevant
equitable considerations; provided, however, that, in any such case, (A) no such
Holder will be required to contribute any amount in excess of the public
offering price of all such Registrable Securities offered and sold by such
Holder pursuant to such registration statement; and (B) no person or entity
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) will be entitled to contribution from any person or entity who was
not guilty of such fraudulent misrepresentation.
7.6 SURVIVAL. The obligations of the Company and Holders
under this Section 7 shall survive the completion of any offering of Registrable
Securities in a registration statement, and otherwise.
8. "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that it
shall not, to the extent requested by the Company or an underwriter of
securities of the Company, sell or otherwise transfer or dispose of any
Registrable Securities or other shares of stock of the Company then owned by
such Holder (other than to donees or partners of the Holder who agree to be
similarly bound or to any officer or director of the Company) from the effective
date of a
7.
<PAGE> 8
registration statement of the Company filed under the 1933 Act until up to
one-hundred eighty (180) days following such effective date; provided, however,
that:
(A) such agreement shall be applicable only to the
first such registration statement of the Company which covers securities to be
sold on its behalf to the public in an underwritten offering but not to
Registrable Securities sold pursuant to such registration statement; and
(B) all officers and directors of the Company then
holding Common Stock of the Company and all beneficial holders of 5% or more of
the Company's Common Stock enter into similar agreements.
In order to enforce the foregoing covenant, the Company shall have the right to
place restrictive legends on the certificates representing the shares subject to
this Section and to impose stop transfer instructions with respect to the
Registrable Securities and such other shares of stock of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
9. RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to:
(A) make and keep public information available, as
those terms are understood and defined in Rule 144 promulgated under the 1933
Act, at all times after the effective date of the first registration under the
1933 Act filed by the Company for an offering of its securities to the general
public;
(B) use its best efforts to file with the Commission
in a timely manner all reports and other documents required of the Company under
the 1933 Act and the 1934 Act (at any time after it has become subject to such
reporting requirements); and
(C) so long as a Holder owns any Registrable
Securities, furnish to the Holder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the 1933 Act and the 1934 Act (at any time after it
has become subject to the reporting requirements of the 1934 Act), a copy of the
most recent annual or quarterly report of the Company, and such other reports
and documents of the Company as a Holder may reasonably request in availing
itself of any rule or regulation of the Commission allowing a Holder to sell any
such securities without registration (at any time after the Company has become
subject to the reporting requirements of the 1934 Act).
10. TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company shall have
no obligations pursuant to Sections 2 through 9 with respect to: (a) any request
or requests for registration made by any Holder on a date more than five (5)
years after the closing date of the
8.
<PAGE> 9
Company's initial public offering; or (b) any Registrable Securities proposed to
be sold by a Holder in a registration pursuant to Section 2 (other than in the
initial public offering by the Company) or 3 if, in the opinion of counsel to
the Company, all such Registrable Securities proposed to be sold by a Holder may
be sold in a three-month period without registration under the 1933 Act pursuant
to Rule 144 promulgated under the 1933 Act.
11. ASSIGNMENT AND AMENDMENT.
11.1 ASSIGNMENT. The registration rights of a Holder hereunder
may be assigned only to a party who acquires at least ten percent (10%) of the
Registrable Securities issued to CMC in the CSHC distribution; provided,
however, that no party may be assigned any of the foregoing rights unless the
Company is given written notice by the assigning party at the time of such
assignment stating the name and address of the assignee and identifying the
securities of the Company of which the rights in question are being assigned;
and provided further that any such assignee shall receive such assigned rights
subject to all the terms and conditions of this Agreement, including without
limitation and the provisions of this Section.
11.2 AMENDMENT OF RIGHTS. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of a majority of the Registrable
Securities then outstanding. Any amendment or waiver effected in accordance with
this Section 11.2 shall be binding upon each Holder, each permitted successor or
assignee of such Holder and the Company.
12. REPRESENTATIONS, WARRANTIES AND COVENANTS.
12.1 CAPITAL STOCK. The Company has an authorized
capitalization consisting of 81,000,000 shares of common stock, $.0001 par
value, of which 31,706,871 shares are issued and outstanding, 3,347,669 shares a
unissued but authorized for issuance pursuant to issued stock options, and
14,632,062 shares of preferred stock, $.0001 par value, of which 14,632,062
shares have been designated as Series A, none of which are issued and
outstanding. All such outstanding shares have been duly authorized and validly
issued and are fully paid and nonassessable. The Company intends to enter into a
Merger Agreement with BCS Technologies, Inc. ("BCS") pursuant to which a
subsidiary of the Company will merge with and into BCS (the "Merger"), the
former stockholders of BCS will receive an aggregate of 39,811,807 shares of the
Company's Common Stock, and an additional 964,955 shares of Common Stock will be
reserved for issuance upon exercise of outstanding BCS stock options assumed in
the Merger. Immediately prior to the Merger, the Company plans to issue
5,700,868 shares of Common Stock to CSHC in connection with the acquisition of
Cortelco Puerto Rico, Inc. In connection with the Merger, the Company also
intends to effect a reverse split of the Company's Common Stock by means of
amendment of its Certificate of Incorporation changing the par value per share
of the Company's Common Stock from $.0001 to $.001, and convert each share of
the Company's Common Stock outstanding at the effective time of the amendment
into one-tenth (1/10th) share of the Company's Common Stock (the "Reverse
Split"). Such amendment shall change the par value per share of each share of
Series A Preferred Stock of the Company from $.0001 to $.001, with a
corresponding reduction in the number of shares of Series A Preferred Stock
authorized. In
9.
<PAGE> 10
addition to the foregoing changes, the Certificate of Incorporation of the
Company shall be further amended to increase the authorized Company Common Stock
(after consideration of the effect of the Reverse Split) to 50,000,000 shares
and increase the authorized Series A Preferred Stock (after consideration of the
effect of the Reverse Split) to 5,000,000 shares. After taking into account the
effects of the Puerto Rico acquisition and the Merger (but not the Reverse
Split), immediately after the Merger, 77,219,546 shares of the Company's Common
Stock will be issued and outstanding, 10,450,470 shares will be unissued but
authorized for issuance pursuant to issued stock options, and 14,348,944 shares
will be unissued but authorized for issuance pursuant to conversion rights under
the Series A Preferred Stock (all of such shares totaling 102,018,960 shares).
There are no subscriptions, options, warrants, equity securities, partnership
interests or similar ownership interests, calls, rights (including preemptive
rights), commitments or agreements of any character to which CSI is a party or
by which it is bound obligating CSI to issue, deliver or sell, or cause to be
issued, delivered or sold, or repurchase, redeem or otherwise acquire, or cause
the repurchase, redemption or acquisition of, any shares of capital stock,
partnership interests or similar ownership interests of CSI or obligating CSI to
grant, extend, accelerate the vesting of or enter into any such subscription,
option, warrant, equity security, call, right, commitment or agreement.
12.2 AUTHORITY RELATIVE TO THIS AGREEMENT. CSI has all
necessary corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by CSI and the
consummation by CSI of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part of CSI and no
other corporate proceedings on the part of CSI are necessary to authorize this
Agreement or to consummate the transactions so contemplated. This Agreement has
been duly and validly executed and delivered by CSI and, assuming the due
authorization, execution and delivery by CMC, constitutes legal and binding
obligations of CSI, enforceable against CSI in accordance with its terms, except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting
enforcement of creditor's rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, or (ii) to the extent this Agreement may be limited by applicable
federal or state securities laws or public policy considerations.
12.3 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(A) The execution and delivery of this Agreement does
not, and the performance of this Agreement or the Registration Rights Agreement
by CSI shall not, (i) conflict with or violate the Certificate of Incorporation
or Bylaws of CSI, (ii) conflict with or violate any law, rule, regulation,
order, judgement or decree applicable to CSI or by which its properties is bound
or affected, or (iii) result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or impair CSI's rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of CSI pursuant to, any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which CSI is a party or by which CSI or its
properties are bound or affected.
10.
<PAGE> 11
(B) The execution and delivery of this Agreement and
the Registration Rights Agreement do not, and the performance of this Agreement
and the Registration Rights Agreement by CSI shall not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
court, administrative agency, commission, governmental or regulatory authority,
domestic or foreign, except (A) for the applicable requirements, if any, of the
Securities Act, the Exchange Act, the Blue Sky Laws and (B) where the failure to
obtain such consent, approvals, authorizations or permits, or to make such
filings or notifications, would not be material to the CSI or have a material
Adverse effect on the parties hereto, prevent consummation of the transactions
contemplated by this Agreement or otherwise prevent the parties hereto from
performing their obligations under this Agreement.
12.4 FINANCIAL STATEMENTS AND NO MATERIAL CHANGES. The Company
has heretofore furnished CMC with the unaudited balance sheets of the Company as
of January 31, 1999, and as of July 31, 1998, and the related statements of
income, cash flow and stockholders' equity for the periods then ended (the
"Company Financial Statements"). Such financial statements have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods indicated; provided, however, that certain year-end audit
adjustments have not been made and such financial statements omit footnotes
otherwise required by generally accepted accounting principles. The balance
sheets included in the Company Financial Statements fairly present the financial
condition of the Company at the dates thereof and, except as indicated therein,
reflect all claims against and all debts and liabilities of the Company, fixed
or contingent, as at the dates thereof; and the related statements of income,
cash flow and stockholders' equity fairly present the results of the operations
of the Company. Since January 31, 1999, there has been (i) no material adverse
change in the Company, whether as a result of any legislative or regulatory
change, revocation of any license or rights to do business, fire, explosion,
accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or
action of God or other public force or otherwise and (ii) to Company's
knowledge, no fact or condition exists or is contemplated or threatened which
might cause such a material adverse change in the future.
12.5 LIABILITIES. The Company has no outstanding claims,
liabilities or indebtedness, contingent or otherwise, except as set forth in the
Company Financial Statements or referred to in any footnotes thereto, other than
liabilities incurred subsequent to January 31, 1999 in the ordinary course of
business. The Company is not in default in respect of the terms or conditions of
any indebtedness.
12.6 CSI COVENANTS. The Company covenants and agrees that it
will use its best efforts to complete the Merger within thirty (30) days of the
date of this Agreement.
13. GENERAL PROVISIONS.
13.1 NOTICES. Any notice, request or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered or if deposited in the U.S. mail by
registered or certified mail, return receipt requested, postage prepaid, as
follows:
11.
<PAGE> 12
(A) if to CMC, at:
CEO and CFO
CMC Industries, Inc.
4950 Patrick Henry Drive
Santa Clara, CA 95054
with a copy to:
Marty Korman
Peter Bergman
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
(B) if to the Company, at:
President
Cortelco Systems, Inc.
4119 Willow Lake Blvd.
Memphis, Tennessee 38118
Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. Notice shall conclusively be
deemed to have been given when personally delivered or when deposited in the
mail in the manner set forth above.
13.2 ENTIRE AGREEMENT. This Agreement, together with all the
Exhibits hereto, constitutes and contains the entire agreement and understanding
of the parties with respect to the subject matter hereof and supersedes any and
all prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties respecting the registration rights of CMC
described herein.
13.3 GOVERNING LAW. This Agreement shall be governed by and
construed exclusively in accordance with the internal laws of the State of
California as applied to agreements among California residents entered into and
to be performed entirely within California, excluding that body of law relating
to conflict of laws and choice of law.
13.4 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, then such provision(s) shall
be excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
13.5 THIRD PARTIES. Nothing in this Agreement, express or
implied, is intended to confer upon any person, other than the parties hereto
and their successors and assigns, any rights or remedies under or by reason of
this Agreement.
12.
<PAGE> 13
13.6 SUCCESSORS AND ASSIGNS. Subject to the provisions of
Section 11.1, the provisions of this Agreement shall inure to the benefit of,
and shall be binding upon, the successors and permitted assigns of the parties
hereto.
13.7 CAPTIONS. The captions to sections of this Agreement have
been inserted for identification and reference purposes only and shall not be
used to construe or interpret this Agreement.
13.8 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.9 COSTS AND ATTORNEYS' FEES. In the event that any action,
suit or other proceeding is instituted concerning or arising out of this
Agreement or any transaction contemplated hereunder, the prevailing party shall
recover all of such party's costs and attorneys' fees incurred in each such
action, suit or other proceeding, including any and all appeals or petitions
therefrom.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
13.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
THE COMPANY: HOLDER:
CORTELCO SYSTEMS, INC. CMC INDUSTRIES, INC.
By: /s/ Stephen N. Samp By: /s/ Matthew G. Landa
------------------------------------ ---------------------------------
Title: VP - Chief Financial Officer Title: President & CEO
--------------------------------- ------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT APRIL 30, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED APRIL 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 5,260
<SECURITIES> 0
<RECEIVABLES> 26,002
<ALLOWANCES> 0
<INVENTORY> 30,838
<CURRENT-ASSETS> 63,599
<PP&E> 19,276
<DEPRECIATION> 0
<TOTAL-ASSETS> 94,005
<CURRENT-LIABILITIES> 47,982
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 40,035
<TOTAL-LIABILITY-AND-EQUITY> 94,005
<SALES> 206,991
<TOTAL-REVENUES> 206,991
<CGS> 200,538
<TOTAL-COSTS> 200,538
<OTHER-EXPENSES> 9,354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,114
<INCOME-PRETAX> (4,015)
<INCOME-TAX> (1,506)
<INCOME-CONTINUING> (2,509)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,509)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
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